Euro plunges as European Central Bank unveils large scale quantitative easing

Enrique Díaz-Álvarez23/Jan/2015Currency Updates

GBP

Sterling climbed substantially against the Euro after the ECB announcement, although cable was down 0.55% during the course of trading on Thursday.

Borrowing by the UK government printed higher in December at £13.1 billion, up substantially on the £10.3 billion recorded a year earlier. Total borrowing in the UK between April and December last year did, however, fall slightly from £86.4bn to £86.3bn. While the reduction is minimal, it will nonetheless be welcome news to Chancellor George Osborne, who has had to explain months of poor borrowing.

At 9.30am this morning National Statistics will release its retail sales data, with YoY sales expected to down from their six month high recorded in November.

EUR

Focus among world markets on Thursday was firmly on Frankfurt and Mario Draghi, who yesterday announced that the European Central Bank (ECB) is to begin the launch of its long awaited quantitative easing programme. While expected, Draghi surprised most by announcing that the central bank will purchase public and private sector securities for a total size of €60 billion a month; far greater than the €50 billion total that the markets had priced in. This will begin in March and will be conducted until September 2016, or longer if inflation fails to rise back to its target. The mammoth quantitative easing program could amount to around 1.2 trillion Euros and, according to Draghi, return inflation gradually back to its 2% target next year.

On the negative, only 20% of asset purchases will be subject to risk sharing, and as such, national central banks will undertake the remaining bond purchases, highlighting the lack of commitment to a Eurozone-wide fiscal policy. Only time will tell as to whether yesterday’s announcement will be enough to provide a sufficient boost for the ailing Eurozone economy, which has seen growth and inflation stagnate.

While the markets had priced in QE, Euro reaction was volatile and the slump in the currency considerable. The single currency was down 1.5% against the Dollar, hitting a fresh eleven year low, and 0.9% down versus Sterling, with major falls against other peers. Manufacturing growth in Germany and the Eurozone set for release today, although market volatility will largely centre on proceedings yesterday.

USD

Thursday’s announcement in Europe caused the US Dollar to soar against its major peers, with the US Dollar index climbing to its strongest position since September 2003, up 1% for the day.

Data releases in the US were mixed, although overshadowed by the ECB announcement. Weekly jobless claims in the US showed that the number of Americans filing for new jobless benefits fell last week to 307,000. Despite the fall, this number was still slightly higher than anticipated and caused the four week moving average to increase by 6,500 to its highest mark since July last year. Continuing jobless claims actually rose last week, up by 15,000 from the previous week. Elsewhere, house prices rose more than expected in November, climbing by 0.8% after job growth boosted demand.

Manufacturing growth data out in the US today as Markit Economics releases its flash PMI at 2:45pm UK time.

Rest of the world

Immediately after the ECB’s announcement the Danish Central Bank slashed its benchmark rate for the second time in just four days; a clear indication of the immense pressure the currency is under following Euro’s decline. The deposit rate was lowered from -0.2% to -0.35%. By contrast, the Central Bank of Brazil once again hiked interest rates for a third straight meeting. Increases in the price of electricity and transport have amplified inflationary pressures on the economy, causing the central bank to raise the benchmark rate 50 basis points to 12.25%.

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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.