FOREX-Euro tumbles on surprise ECB rate cut

Jessica Mortimer
Thursday, 7 Nov 2013 | 8:15 AM ET

* ECB unexpectedly cuts interest rates to 0.25 percent

* Draghi news conference awaited at 1330 GMT

* Euro hits 7-week low versus dollar

LONDON, Nov 7 (Reuters) - The euro fell to a seven-week low against the dollar on Thursday after the European Central Bank unexpectedly cut interest rates to 0.25 percent following a sharp drop in inflation.

Although some in the market had expected a rate cut as early as this week, traders said most were betting the ECB would wait until December.

Focus shifted to ECB President Mario Draghi's news conference at 1330 GMT. Analysts said the euro could come under further pressure if Draghi signals the ECB could take more action to loosen policy.

Any comment from Draghi that the euro's strength could be a risk to price stability in the euro zone could also weigh on the currency.

The euro tumbled more than 1 percent on the day to hit $1.33535, more than a cent below where it was trading before the ECB decision and its lowest level since Sept. 18. It also dropped to a 10-month low against sterling and a one-month trough against the yen.

"The market had not priced in a cut. So the euro will head lower and we can see it move towards the $1.32 area," said Alvin Tan, currency strategist at Societe Generale.

"We expect Draghi to be dovish in his press conference as he has to justify this surprise cut, having sounded fairly neutral to hawkish just a few weeks back."

The euro dropped below strong chart support at $1.3462 from a trendline drawn from lows hit in early July, with the break below there accelerating its losses.

Euro/dollar could fall further if Friday's U.S. jobs report for October is on the strong side and suggests the economy has weathered the partial government shutdown.

This would be seen as making it more likely the Federal Reserve will scale back monetary stimulus soon, in contrast to the ECB's accommodative stance.

"Market expectations for U.S. data have been lowered so much that there's the potential for positive surprises now," Morgan Stanley's Stannard said.

The dollar index hit a 1-1/2 month high of 81.128.