Euro soars despite massive ECB stimulus measures
11/Mar/2016 • Currency Updates•
The Euro strengthened sharply across the board on Thursday, ending higher against both the Pound and the US Dollar, despite the European Central Bank surprising the currency markets by launching much-stronger-than-expected stimulus measures.
Read the full post-ECB report.
The single currency initial plunged by the most in five months against the US Dollar after the central bank announced it would be cutting both of its main interest rates. The benchmark refinancing rate was unexpectedly slashed from 0.05% to zero, while the deposit rate was lowered by 10 basis points to -0.4%, in line with our and indeed the markets’ expectations.
In tandem, the Governing Council also ramped up its quantitative easing programme by 20 billion Euros to 80 billion Euros, higher than the 10 billion Euro increase priced in by the markets.
Notably, the ECB will also now buy investment-grade corporate bonds, in addition to the government debt it had already been purchasing. This increase in monetary easing measures is extremely significant in magnitude and surprised even the most bearish of economists.
However, ECB President Mario Draghi sent the Euro sharply higher during the accompanying press conference. While Draghi reiterated rates will stay very low for a long period of time, and well beyond the timetable of asset purchases, he claimed he didn’t anticipate any further interest rate cuts.
The prospect of no further rate cuts sent the single currency to its strongest position against the US Dollar in three weeks, and a massive 3% higher from its session low.
Despite the rebound in the single currency, we think an expansion in the ECB’s monetary stimulus measures of this magnitude is very meaningful and, once the Euro has stabilised, should place a large amount of downward pressure on the single currency in 2016.
Major currencies in detail:
The Pound had a volatile day following the ECB announcement on Wednesday. Sterling ended 1.2% lower against the Euro, although didn’t suffer as badly as the US Dollar, ending 0.7% higher against the Greenback.
Early in the day, house prices in Britain kept up a rapid pace of growth in February. The monthly house price index from RICS rose to +50 from +48. Prices have been pushed up of late as property investors sought to buy housing before a 3% surcharge takes effect next month.
However, with no major announcements in the UK on Thursday, almost all Sterling volatility was driven by events in the Eurozone.
Trade balance data this morning will take a back seat. Almost all movement in the Pound today will again be driven by reaction to yesterday’s ECB announcement.
One of the most volatile trading days for the Euro in recent times saw the currency initially fall by over 1% against the US Dollar before spiking to end 2% higher.
Yesterday’s reaction in the Euro was all the more surprising given the aggressive nature of the ECB’s measures. In addition to the rate cuts and QE expansion, the central bank will also launch four targeted, longer-term refinancing operations (TLTRO’s), each with a four-year maturity and negative rate. This essentially means that the ECB will be paying banks to borrow money.
It remains to be seen whether such drastic measures will be enough to kick-start the stagnant Eurozone economy that has weak growth and non-existent inflation.
Economic data today will be almost completely overlooked, with the Euro driven by traders’ repositioning following Thursday’s volatility.
The US Dollar index tanked by 1.1% following the ECB press conference.
Announcements in the US on Thursday were mostly second-tier. Jobless claims for the week were once again very healthy, continuing to point to an improvement in labour market conditions.
Claims for last week declined by 18,000 to a seasonally adjusted 259,000, its lowest level since mid-October. The more representative four-week moving average fell by 2,500 to 267,500.
The monthly budget statement also made for very encouraging reading, increasing more than expected to a multi-year high of 193 billion US Dollars from a previous 55 billion Dollars.
Economic news to end the week is light. Attention in the currency markets will now turn to next week’s Federal Reserve meeting on Wednesday evening.
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