- EUR/USD has jumped on the high interest rate attached to the ECB's new funding scheme.
- Markets have ignored the pushback on interest rates.
- The euro may turn down, providing a selling opportunity.
The European Central Bank has surprised markets by announcing a relatively high interest rate on the new funding scheme – 10 basis points above the deposit rate. The terms of this TLTRO program have sent the euro higher as markets ignored the pushback in the guidance regarding interest rates.
The ECB has now pledged to keep interest rates low at least through the first half of 2020 – no less than six months – a substantial dovish tilt from a central bank that has negative interest rates.
And additional adverse news may still come.
ECB President Mario Draghi has often painted a dark picture of the euro-zone economies and also of the global one. He may highlight the risks of trade wars – or protectionism in his jargon. A dovish message will probably be accompanied by a downgrade of economic forecasts from the Frankfurt-based institution's staff.
And even if Draghi refrains from rocking the boat – it is already sinking. Once the dust settles, markets may realize that the bank is set to keep its ultra-loose monetary policy for longer and may even opt for renewing Quantitative Easing it worked so hard to conclude last year.
All in all, there is more negative than positive in the ECB's decision – and euro bulls could pay the price.
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