Traders and corporates with exposure to European markets were left stunned after the European Central Bank slashed rates to a new record low and left the door open to more stimulus as the euro tumbled across the board.

The sterling rallied to a nine-month high against the euro after the Bank of England’s no change on rates opened up the divergence between UK and eurozone monetary policy. However, while the ECB cut rates from 0.5 per cent to 0.25 per cent, BoE Governor Mark Carney could weaken the sterling after next week’s inflation report by damping speculation about an earlier rate hike in the UK.

The US dollar also soared against the euro and at one stage by almost two per cent, helped by an unexpectedly strong reading on US third quarter GDP. Initial data showed the US economy expanded at an annual rate of 2.8 per cent in Q3 versus expectations of a slowdown to two per cent from 2.5 per cent in Q2.

Sterling

The British pound surged to its best levels since January against the euro with the single currency suffering a dramatic fall after the Bank of England made no changes to its policy while its European counterpart cut rates to a new record low. The BoE’s decision was almost predictable as markets expect the UK central bank to upgrade its economic growth forecasts in its Inflation Report.

US dollar

The US dollar at one stage soared by almost two per cent above the day’s low against the euro after the European Central Bank cut interest rates and US GDP data beat market forecasts. The US dollar also rose sharply to almost two-month peaks against a currency basket and could add to those gains if data on US jobs growth increases the chances of the Federal Reserve tapering its stimulus programme in December or very early next year.

Euro

The euro plunged by the most in two years against the US dollar and hit a nine-month low against the sterling after the European Central Bank caught many in the market off-guard by cutting its main interest rate to yet another new record low. In a bid to prevent inflation across the euro area turning into deflation, President Mario Draghi slashed borrowing rates from 0.5 per cent to 0.25 per cent.

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