Euro under pressure with ECB expected to announce QE expansion

Enrique Díaz-Álvarez30/Nov/2015Currency Updates

On Thursday 3rd December, European Central Bank (ECB) policymakers will be convening for the Governing Council’s December monetary policy meeting. President Mario Draghi is widely anticipated to announce an expansion to the existing monetary easing measures.


The ECB announced back in January that it would begin the process of purchasing government bonds at a rate of 60 billion Euros a month, in a bid to bring inflation back to its official target of “close to, but below 2%”.

However, almost a year on from the announcement, inflation remains close to zero and the general economic performance in the Euro-area has remained disappointing. The improvements that the stimulus measures were intended to produce have failed to materialise.

Inflation has remained stagnant, registering just 0.1% in October following twelve months of negative or near zero price growth (Figure 1). Producer prices have fared even worse, contracting by 3.1% last month, having now declined in every month since mid-2013. Economic growth has improved somewhat in the second half of this year, but remains firmly below 2%.

Figure 1: Eurozone Inflation Rate (2011 – 2015)
Figure 1 Eurozone Inflation Rate (2011 2015)

Source: Thomson Reuters Datastream Date: 30/11/2015

As a result, we have seen a stream of dovish comments from Eurozone policymakers in the past few months. At the most recent meeting, Mario Draghi claimed that inflation would remain low for a “protracted amount of time”, with the existing stimulus programme to be “re-examined” at the next meeting.

Draghi has since suggested that the central bank will “do what it must” to boost price growth. He also confirmed that the ECB is considering using a range of measures, including cutting the interest rate on deposits even further into negative territory.

Our Expectations

Markets expect aggressive easing from the ECB on Thursday and we think the Council will try not to disappoint. We expect the following announcements:

  • An expansion of the size and duration of the current quantitative easing (QE) programme. The rate of purchases will be increased from 60 billion Euros to 80 billion Euros, and the programme will be extended through to the end of 2016.
  • Widening the range of instruments to be purchased to include regional and municipal bonds. This will make sure that the ECB has enough variety of instruments to purchase, given that sovereign bond yields are increasingly too low to be purchased, according to the ECB’s own rule that it will not purchase instruments yielding below the deposit rate.
  • A cut in the deposit rate to -0.4% from -0.2%. Denmark and Switzerland have shown that interest rates can be cut considerably below zero without causing (so far) a rush to physical cash in an attempt to avoid paying negative rates on bank deposits.

The expected expansion of the European Central Bank’s quantitative easing (QE) measures highlights the ever more diverging monetary policy stances adopted by the ECB, the Federal Reserve in the US and, to a lesser extent, the Bank of England.

Implications for currency markets

In sharp contrast to the Eurozone, the US economy is performing well. Growth has remained robust, the labour market is healthy and core inflation is showing signs of improvement. The Fed’s monetary policy is therefore heading in the opposite direction to the ECB’s, with the US central bank on course to hike interest rates for the first time in nine years at the 16th December FOMC meeting.

Meanwhile, despite some dovish comments from the Bank of England of late, interest rates still look on course to go up in the UK, likely at some point in the second half of 2016. This divergence has caused a sharp depreciation of the Euro in the past year versus the Pound, and to an even greater extent, against the US Dollar (Figure 2).

Figure 2: Historical Evolution of EUR/USD & EUR/GBP (2011 – 2015)
Figure 2 Historical Evolution of EURUSD EURGBP (2011 2015)

Source: Thomson Reuters Datastream Date: 30/11/2015

The divergence in monetary policies, in our view, should continue to place downward pressure on the Euro over the coming months against almost every major currency.

The depreciation will likely be most severe against the US Dollar, and we continue to expect parity between the Euro and USD to be reached at some point in the second quarter of 2016.


Receive daily or weekly market updates via email



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.