Euro plunges after dovish Draghi statement

Enrique Díaz-Álvarez22/Oct/2015Currency Updates

The Euro was sent plunging against its major peers this afternoon following a very dovish monetary policy statement from the European Central Bank (ECB).

Downside risks

President of the ECB Mario Draghi highlighted downside risks to both the growth and inflation outlook of the Eurozone. Headline inflation is expected to remain low for a “protracted amount of time”, with expectations for price growth declining in the short term. Inflation has remained at or below zero for the past eight months (Figure 1), despite the launch of the 60 billion Euros a month QE programme in March.

Figure 1: Eurozone Inflation Rate (2014 – 2015)

Source: Thomson Reuters Date: 22/10/2015 Time: 3:00pm

Emerging market currencies have also proved to be of significant concern to policymakers, with the recent slowdown in China providing a drag on external demand and therefore economic growth.

Stimulus programme

Draghi reiterated the stimulus programme will continue at least to September 2016, and longer if needed. Critically, and in line with our expectations, he also indicated that there may be an expansion of the existing programme before the end of the year. Draghi claimed the Governing Council would need to “re-examine” the level of monetary stimulus at its December meeting.

The statement made it clear that the central bank was considering other measures to stimulate the Eurozone’s flagging economy, including pushing the interest rate on bank deposits even further into negative territory. A change in the central bank’s stance, from “wait and see” to “work and be ready”, strongly suggests that we’ll see action from ECB policymakers over the coming months.

Impact on the Euro

The single currency tanked by over a percent against the both the Pound and the Dollar (Figure 2) following the announcement, touching its lowest level against the Greenback since early October.

Figure 2: Intra-day Evolution of EUR/USD (22/10/15)

Source: Thomson Reuters Date: 22/10/2015 Time: 3:00pm

The prospect of an expansion of the central bank’s QE programme before year-end will weigh on the single currency against almost all of its major peers, especially the US Dollar, which we believe is on course for an interest rate hike in December.

A weaker Euro would be welcome news for UK businesses importing from the Eurozone, while exporters may suffer as their products become relatively more expensive.


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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.