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Euro crushed by prospects of negative deposit rates

FXstreet.com (Córdoba) - The euro slumped on Thursday after the European Central Bank cut rates as expected and left the door opened to negative deposit rates if the data deteriorates. In a press conference, President Mario Draghi said the bank is technically ready for negative deposit rates and noted downside risks to the economy.

The ECB has kept a zero rate on deposits in an attempt to discourage banks to just keep money at the ECB and activate the lending market. A negative deposit rate would be a more drastic measure, and mean banks will have to pay the ECB for holding euro deposits.

"Although Draghi reiterated that the ECB was technically prepared for a cut in the deposit rate, in the past he had warned about the potential negative consequences. Now he is saying has an open mind", commented Marc Chandler, analyst at Brown Brothers Harriman.

In terms of price action, EUR/USD spiked to a high of 1.3218 earlier when Draghi said monetary policy will remain accommodative for as long as needed but then lost over 100 pips in a matter of minutes, weighed by prospects of negative rates. EUR/USD broke through several support levels bottomed out at 1.3037 in recent dealings.

ECB action coupled with inability to break decisively above 1.3230 (50% retracement of 1.3710/1.2746) have put EUR/USD under pressure in the short term, although the pair holds a rather neutral tone in bigger time frames.

Below 1.3000, EUR/USD could accelerate losses toward 1.2955 (200-day SMA) and even to the 1.2840/50 area. On the other hand, the cross needs to regain 1.3155 (100-day SMA) to improve short-term picture, but it would need a close above 1.3230 for a longer-term confirmation.

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