The ECB cut rates by 25 bps overnight. My understanding of their reasoning is that they do not want to, or cannot, go down the QE path. As soon as they reach 1%, there are few other options left open to them. QE for the ECB would be incredibly difficult to implement, if not impossible due to the large number of central banks involved.
With the increased IMF funding promises coming out of the G20 and a supposed unified approach from all major participants, the market is feeling good again and risk is back in vogue. This will be good for the EUR in the short term, especially with pressure easing on Eastern Europe. EUR/USD will probably test 1.40 again in coming weeks and EUR/JPY should also benefit significantly.
The underlying problem for the ECB however is not going away. They have very few policy options left open to them and if the rest of the world cannot sustain an ongoing recovery, any rally in the EUR will peter out very quickly. Then we might see the really big EUR sell off.
