Euro remains resilient following drastic ECB measures

Enrique Díaz-Álvarez14/Mar/2016Currency Updates

Exceeding investors’ expectations, the European Central Bank didn’t just cut the deposit rate, as expected by the markets, but also increased its quantitative easing programme and slashed its refinancing rate to zero.

As a reaction to the news the Euro first dropped sharply but recovered straightaway after ECB President Mario Draghi mentioned in the press conference that no further cuts are expected.

The QE programme now includes the purchase of corporate bonds. To ease concerns about the impact of negative rates on bank viability the ECB also announced an exceedingly generous renewal of the TLTRO long-term financing programme at rates as low as the deposit rate itself.

Following the ECB meeting risk assets soared worldwide, led by bank shares. Emerging market currencies, in particularly, were in high demand. The Brazilian Real, for example, rose over 5% last week – it has already reached the appreciation target for the first quarter of 2016 that we had forecast.

Many businesses are puzzled by the resilience of the Euro. Some Dollar buyers have been taking advantage of the rebound to hedge before the divergence of monetary policies puts pressure on the Euro again.

Major currencies in detail:


Businesses in the UK are this week focussing on the impact the Bank of England meeting may have on the Pound. We expect no change in rates and the purchase target. However, less dovish comments from the Monetary Policy Committee would fuel Sterling and help it recover against both the Euro and the US Dollar.

Last week was data-light in the UK. Industrial production in January came in on the soft side, although it still managed to exceed expectations. Much of the blame can be ascribed to the volatile mining and quarrying sectors. So far, the numbers coming in are still in line with 2% GDP growth in the first-quarter, despite the global financial wobbles and the emerging market slowdown.


The ECB Governing Council announced on Thursday that it would be cutting its deposit rate even deeper into negative territory, to -0.4%, and the refinancing rate to zero from 0.05%.

The QE programme, launched 12 months ago, was ramped up by an additional 20 billion Euros a month to 80 billion Euros. And the ECB announced it would be including corporate bonds in the programme.

Perhaps most significantly, the bank also said that it would be launching four new rounds of TLTROs of four-year maturity, with rates as low as the deposit rate. What this means is that the cost on banks’ excess reserves will effectively be paid back through lower funding costs – and further cuts to the depo rate are certainly a possibility.

Draghi reiterated that rates would stay very low for a long period of time, and well beyond the timetable of asset purchases. The Euro recovered all of its losses after he suggested he didn’t anticipate any further interest rate cuts. Words to this effect have been used by ECB officials after just about every cut though, and we believe that the Euro rally in reaction to them is an overreaction.


Last week was also rather data-light in the US. The US Dollar mostly reacted to the news coming from the ECB.

As the Euro and emerging market currencies both rallied (a rare occurrence), the US Dollar lost ground against every major currency apart from the New Zealand Dollar, which was rocked by the decision of the Reserve Bank of New Zealand to unexpectedly cut its interest rate on Wednesday evening.


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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.