Underwhelming ECB quantitative easing announcement sends Euro surging

Enrique Díaz-Álvarez04/Δεκ/2015Currency Updates

The Euro was sent sharply higher against all of its major peers yesterday after the European Central Bank disappointed almost everyone’s expectations at its latest monetary policy meeting on Thursday afternoon.

The degree of additional economic stimulus announced was far below the level anticipated. Traders subsequently reacted by piling into the Euro and sending the single currency soaring by a massive 3% against the US Dollar and by 2% versus Sterling.

These market conditions can allow businesses to take advantage of current Euro strength. Today’s nonfarm payrolls out of the US could be a prerequisite for a December interest rate hike across the Pond. This, coupled with increasing US bond yields, means we could see capital flight leaving areas such as the Eurozone.

A Financial Times leak prior to the official ECB announcement yesterday suggested that the ECB would be keeping its interest rates unchanged. This was proved false just minutes later, when the ECB announced at 12:45pm that it would be cutting its deposit rate from -0.2% to -0.3%, a more modest cut than the 0.2% reduction that the market had been expecting.

The Euro was sent higher still when President Mario Draghi announced that the monthly asset purchases would remain at 60 billion Euros, defying expectations of an expansion. Instead, the programme will be extended from September 2016 to March 2017.

Attention in the currency markets quickly turns to the US and the release of the labour report for November. Providing there is no disaster, investors will continue to bet on a December Federal Reserve rate hike today.

Major currencies in detail:


Sterling was unsurprisingly driven lower against the Euro yesterday, although experienced strong gains of 1.2% versus the US Dollar following a lack in sentiment for USD after the ECB announcement.

There was little of note out in the UK on Thursday, with all attention on the ECB. The latest survey from Markit went almost completely under the radar. Hopes of a pick-up in overall economic growth in the final quarter of the year were given a boost by service sector growth for November, with the PMI jumping to a four-month high of 55.9 from 54.9 in October.

The uptick in service sector performance will be a welcome upturn in fortunes as slower growth was recorded in the manufacturing and construction sectors earlier in the week. This would put the UK economy on course for expansion of around 0.6% in Q4.

Halifax house prices are out this morning, although all movement in Sterling will likely be driven by fallout from the ECB and the US labour report.


The Euro rose across the board yesterday, reaching a three and five-week high against the US Dollar and Pound respectively.

Thursday’s measures were a significant disappointment, with the market, and ourselves included, expecting an expansion in monthly purchases to around 75/80 billion Euros and a cut in the deposit rate to -0.4%.

However, an extension in the programme to March 2016 still amounts to a net increase of 360 billion Euros, and could help boost inflation in the stagnating economy. Critically, there remains an element of flexibility in the programme, with the technical parameters of the easing measures set to be reviewed “in the spring”. This means we could yet see an expansion in QE if economic data dictates.

Yesterday’s reaction in the Euro was significant and unprecedented. However, an extension in the central bank’s quantitative easing programme still highlights the divergence in monetary policy between the US and the Eurozone, and we leave our Euro forecasts unchanged at 1.05 for the end of the year, and parity at some point in Q2 2016.


Unsurprisingly the US Dollar index suffered yesterday, ending 2% lower after the ECB release.

Fed Chair Janet Yellen testified in front of Congress on Thursday. Yellen claimed the US economy was on a solid course, although a decision to hike would only occur if the committee expected above-trend growth.

In terms of US economic data, jobless claims of 269,000 continued to point to an improvement in the US labour market. Meanwhile, service sector growth dipped slightly to 56.1 from 56.5 in October, according to Markit.

After last month’s stellar labour report, markets have been increasingly betting on a US rate hike (currently around 75% according to market pricing). Barring a complete disaster in today’s report, set for release at 1:30pm UK time this afternoon, we believe it is now unlikely that any nonfarm payroll report will derail a lift-off from the Fed at their next meeting on 16 December.


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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.