Euro soars after European Central Bank easing measures disappoint

Enrique Díaz-Álvarez03/Dec/2015Currency Updates

The Euro was sent soaring after the European Central Bank (ECB) disappointed almost every expectation at its latest monetary policy meeting.

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

The Euro was sent higher still after Draghi announced that the monthly asset purchases would remain at 60 billion Euros a month, defying expectations of an expansion. The quantitative easing programme will instead be extended beyond the original September 2016 end date to March 2017, a net increase of 360 billion Euros. The influence of Bundesbank hawks in the ECB has clearly been underestimated.

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”.

Eurozone economic disappointments

The extension in monetary easing measures has come amid disappointing economic performance in the Euro-area that has seen inflation well below the central bank’s “close to, but below 2%” target. Inflation registered just 0.1% in November following more than twelve months of negative or near zero price growth (Figure 1).

Figure 1: Eurozone Inflation Rate (2011 – 2015)

Source: Thomson Reuters Datastream Date: 03/12/2015

Impact on the Euro

Markets were clearly underwhelmed by the announcement, having priced-in a QE expansion and a larger cut to the deposit rate. As a result, the Euro’s appreciation was significant, with the currency soaring a massive 2% against the US Dollar, to its strongest position in a month, and by 1.75% versus Sterling (Figure 2).

Figure 2: Intra-day Evolution of EUR/USD (03/12/2015)

Source: Thomson Reuters Date: 03/12/2015

What does the future hold?

Despite the lack of QE expansion, today’s announcement still highlights the ever growing divergence in monetary policies adopted by the European Central Bank and the Federal Reserve. The Fed looks on course to hike US interest rates at its next meeting on 16th December.

We therefore leave our forecasts unchanged, and expect EUR/USD to end the year at around the 1.05 level, before reaching parity at some point in the second quarter of 2016.

We also continue to expect a long term depreciation of the Euro against Sterling, although this depreciation should prove to be more gradual.


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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.