ECB: what should we expect in terms of September action following Thursday's dovish meeting?

ECB President Mario Draghi was less inclined than expected at last week's ECB meeting to cut interest rates and implement monetary stimulus. His tone has convinced the markets that the Fed will adopt a similar position at its meeting this week.

According to the current outlook, the Fed will reduce its rates by only a quarter of a point, not in half, as some had suspected.

The ECB kept interest rates stable, but says it could lower them in the coming months and was ready to take further stimulus measures. Mario Draghi then spoke in a dovish tone but did not provide more details on asset purchases and says that it was unlikely that the European economy would slide into a recession.

"Draghi made a lot of promises, but he didn't actually do anything," according to Jefferies' main economist. "He started his speech with strength, but the rest did not meet expectations. I think we expected him to be more engaged than he was. It was expected that the ECB would be ready to act sooner. This has an impact on the forecasts for the Fed meeting this week. Those who expect a 50-basis point reduction should perhaps revise their forecasts to the downside."

The bond markets and the euro, which had slipped to a 1-year low, therefore moved quickly and abruptly, before returning to full strength the same day. Yields on German 10- and 30-year bonds fell when the ECB issued its reports, but reversed sharply as Draghi spoke. The treasury bill market followed suit, and the 10-year U.S. yield, which affects mortgages and other interest rates, fell to 2.01% and then jumped back up to 2.1%.

"Everyone was watching the euro, and it swung in all directions," says Jon Hill of BMO. "There was only a 0.1 basis point decrease against the dollar. There appear to have been conflicting messages from the ECB, but they have certainly led to rate cuts and additional asset purchases. It looks like they're looking in both directions."

Stocks also fell and the Dow Jones was down 150 points at the beginning of the session and remained under pressure throughout the trading day.

Andy Brenner of the National Alliance says that fixed income markets have evolved a lot, with spreads narrowing and then widening for corporate and high yield markets.

"This reaffirms our view that the Fed will only lower interest rates by 25 points," Brenner says.

According to some tools and statistics, the probability of a 0.50% drop in Fed rates is 21% compared to 28% before Mario Draghi's long speech.

"Draghi seems quite optimistic about growth. He says there was nothing to worry about. Maybe it won't end with a bazooka," says John Brigs of NatWest Markets.

"The risks of recession remain low and we are still seeing signs of resilience in the labour market, which continues to improve, although it is true that the dynamics are getting weaker," Draghi said Thursday.

According to Marc Chandler, who works at Bannockburn Global Forex, the reversal of the euro during Draghi's speech is partly due to a short contraction following the trough before the speech. He says that there were many options to drop the eurodollar to 1.1100, and the pair fell to 1.1102.

"Almost every time Draghi spoke, the euro fell. Everyone was biased in favour of a weaker euro," Chandler says.

Chandler says that Draghi "seals the fate" for a 25-basis point drop in interest rates, but "the market has already integrated this information in prices".