ECB surprised the market and drops its cash rate to 0.25%.

It was no major surprise when I woke this morning to see the headlines over the financial news wires that the ECB had decided to drop the official cash rate to 0.25% down from 0.50%. We discussed it in this report yesterday that European growth had once again slowed and this was causing concern at the ECB.

The Euro dropped sharply on the news against all its major trading partners as the ECB President took decisive action and said inflation was the major reason why it decided to cut its official cash rate. Inflation has been stubbornly weak and has recently dropped to 0.7% which is well below its target inflation rate of 2%.

It surprises me that the news wires are saying Draghi's decision was a surprise because Draghi mentioned in one of his reports earlier this year that negative deposit rates (below zero) was a possibility if the Euro Area deteriorated to the extent it needed it. Of course what the ECB does not want to see is Europe with deflation and Draghi so far has dropped interest rates in Europe by 1.25% since late 2011 in an attempt to stave off this threat. Will a drop in rates to 0.25% do the trick now and help Europe continue to recover? That's questionable but it certainly won't hurt things and over the coming days we'll access the situation, do some research and advise Monday if the Fundamental Directional View needs to switch to short or stay long for the Euro.

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