- Euro to Dollar exchange rate at time of update (9-12-16): 1.0614
- Pound to Euro exchange rate at time of update: 1.1851
- Euro to Australian Dollar exchange rate at time of update: 1.4214
The Euro dropped as markets digested the full implications of the ECB's December decision to keep its asset purchase programme running through 2017.
At their December 8 meeting the European Central Bank announced they would hold at -0.4% their deposit rate and the main refi rate at 0.0%.
The Bank also reduced the rate of QE purchases to €60bn per month to end Dec 2017. Remember the asset purchase programme runs at €80BN to March.
But, they warned they may also increase the size or duration of programme if needed - a warning shot to those traders looking to push the Euro and Eurozone bond yields too high.
The maturity range also changed to 1-30 years (from 2-30 years) while the Bank introduces cash as collateral for PSPP securities lending.
HICP (inflation) for next year revised up to 1.3%, GDP to 1.7%.
The reaction by the Euro was surprising in that the currency rallied in an initial knee-jerk reaction on the news that there would be some tapering of the Bank's money-printing programme, before slumping sharply as traders flipped their view on the whole matter.
"It seems the market was taking profits from EUR shorts ahead of the ECB and decided to go short again right after, even though
what the ECB did should have disappointed. We recently argued that the EUR could be on a rollercoaster at the end of the year, but what happened has still surprised us," says Athanasios Vamvakidis at Bank of America Merrill Lynch Global Research.
The amount of bonds bought per month between April and December was reduced to €60bn down from €80bn which at first glance may appear as if the ECB is slowing bond purchases but 6 more months of bond buying at €80bn equals €480bn whereas 9 months of €60bn is €540bn. This misinterpretation was why EUR/USD popped then dropped after the rate decision.
"In total, this is a larger asset purchase program than investors anticipated and on top of that, ECB President Draghi was more dove than hawk," explains Kathy Lien, Director at BK Asset Management in New York.
Analyst Reactions and Predictions for the Euro
Tim Riddell at Westpac:
This extending and effective easing of policy, together with greater flexibility, should, at a minimum, have placed a cap on any further EUR gains into the FOMC next week.
In a broader sense, this effective and extended easing may make EUR a funding currency of choice and so puts EUR-crosses in focus should the consolidation in USD persist. On that basis, EUR/AUD, EUR/CAD and especially EUR/NZD will be ideal shorts into any interim rebounds.
With regards to EUR/USD, rebounds off recent lows in the 1.0500-10 area, which was tested in the immediate aftermath of the Italian referendum result, appear to have affirmed the range lows seen over the past 18-months
Shaun Osborne at Scotiabank:
We view EURUSD levels above 1.08 as very 'rich' relative to the fundamental backdrop. We target EURUSD dropping to 1.02 in H1 2017.
The ECB caught the markets by surprise in announcing a reduction in its asset purchase progamme as of April next year. The consensus had expected the current run rate of EUR80bn in purchases to be extended beyond March for somewhere between 3-6 months. In fact, the ECB announced that it would buy EUR60bn in assets per month through December 2017.
In overall terms, we think the ECB stance remains highly accommodative and suggests a very easy policy bias will persist for the foreseeable future.
Bipan Rai at CIBC Macro Strategy:
In the near-term, monetary policy differentials will drive EUR/USD price action. Levels are off the lows for now, but currently within 1.0630/60 support area. Extensions below this region will need support from a more hawkish FOMC next week.
The ECB felt it was necessary to send a message of stability post the Italian referendum (re: banking sector concerns) and ahead of the upcoming elections in the Netherlands, France and Germany. By extending the purchase program to Dec 2017 they have avoided market debate about tapering through the key election cycle.
Neil Wilson at ETX Capital:
We saw a vicious move in the Euro on the release of the monetary policy statement, with EUR gaining a cent on the dollar before rapidly handing back those gains and turning negative. EURUSD quickly reversed the kneejerk rally as investors took this for a relatively dovish announcement and was last trading down for the day.
Kathleen Brooks at City Index:
Ok, so the ECB didn't do as I expected, but I was right in saying that there is no free lunch at the ECB - they give with one hand, and taper with another!
The ECB has said that it will extend its QE programme out to December next year, however, from April to December asset purchases will be EUR 60 bn per month, EUR 20bn less than the current monthly purchases. This is a shocker, but probably to be expected, after all, the ECB has made sure that its QE programme will easily see it through the EU’s political risk events set for next year and the German elections scheduled for next September.
Was the statement dovish or less dovish than expected? The answer is both… The extension to QE is much longer than we expected, but the tapering announcement is almost hawkish, a mere three days after the Italian’s voted No in its referendum.