Why the Heck Did the Euro Jump After the ECB Statement?!

As expected, the European Central Bank (ECB) stepped up its monetary policy easing in this week’s interest rate decision, announcing the following changes:

  • Quantitative easing program extension by six months to March 2017
  • Reinvestment of principal payments on its asset purchase program
  • Deposit rate cut of 10 basis points to -0.30%

And yep, that’s about it. So much for doing “whatever it takes” to boost growth and inflation as quickly as possible, huh? No wonder euro bears were so disappointed!

EUR/USD 1-hour Forex Chart

EUR/USD 1-hour Forex Chart

Even though the QE extension would bring the total amount of stimulus from the initial 1.1 trillion EUR through September 2016 to roughly 1.5 trillion EUR because of the 60 billion EUR monthly asset purchases for an extra six months, most forex market watchers weren’t exactly blown away by the scale of the program. Many had actually been counting on an increase in monthly purchases thanks to Draghi’s super dovish hints in the past few weeks.

Still, ECB policymakers retained their downbeat inflation outlook for the euro region, downgrading its CPI forecast for 2016 from 1.1% to 1% and for 2017 from 1.7% to 1.6%. What’s interesting to note is that they left their growth forecast for next year unchanged at 1.7% and even upgraded their 2017 GDP estimate from 1.8% to 1.9%.

During his press conference, Draghi went on to explain that the euro zone’s growth prospects are currently being dampened by the slowdown in emerging markets. He added that this is weighing on global trade activity and might continue to hurt demand for the region’s exports.

With that, the ECB head honcho reiterated that they still have enough tools in their monetary policy shed that they can use if the situation keeps worsening. “We’re not excluding the use of all other instruments if we were to decide they were the right ones to do,” Draghi said. However, he also pointed out that their latest moves should suffice for now.

In a nutshell, the euro’s forex rally after the ECB decision and press conference was likely a result of these factors:

  • Profit-taking from previous short EUR positions
  • The lack of “oomph” in the additional stimulus measures
  • Not-so-downbeat ECB growth outlook

So the euro lives to fight another day, but did the fundamental story change? Probably not. At the end of the day, there’s no denying that the ECB is sticking with its very dovish stance and probably just didn’t want to use up all the monetary policy ammunition it has, saving some easing bullets in case its battle with deflation goes on for much longer.

  • ForExchange

    Hi Forex Gump,

    as we are almost chatting on a daily basis, I do believe it is good to be honost and look how to get better, because that is the only way for improvement.

    And here I mean now the fact of how we both missed the ECB statement of the week. Looking back at this week´s posts and chats, we have discussed a lot less serious topics and questions and most likely we just did not give much impact for the most important announcement. It was a good lesson to me as I had EUR short positions.

    I agree with you however, the main fundamentals did not change to the upside, they just do not seem to be as bearish as before.

    Have a great weekend, I am looking forward to see your Sunday article,

    FE

    • Very true! I really didn’t anticipate that it would cause that much of a reaction – and a really prolonged rally to say the least – since the expectations have been priced in for such a long time already. I didn’t write a new preview article on the central bank announcement since I felt like I’d just repeat what was already discussed way back. But I guess it really makes sense that higher expectations do come with a greater room for disappointment.

      Will you be trading euro pairs from here or steering clear for now?

      • ForExchange

        Hmmm interesting question. I am still bearish on the EUR, but I am careful with the selection. Commodity currencies are the first choices.

        For me is more important than the EUR is the USD. We talked many times that regardless of fundamentals we are not buying it. Today this view got confirmed. We had an amazing NFP Report and what a negative reaction? This was the last confirmation for me to stay away from USD pairs. I do not care if EUR/USD goes to parity, I leave those trades for others to make money with.

        • Alfonso Munoz

          Hey pal, you are right about the lack of USD reaction after the good NFP report. It makes me think that US economy cant go much further. US is beeding money (deficit) as the USD gets stronger and stronger. Therefore they export much less and import much more. It’s not sustainable for the US to be just a “services” economy. I would be very careful with long positions on USD.

          About EUR… who knows. The EU will improve. The problem is that the main engine, Germany, has too many open fronts (VW scandal, refugees, exposure to EM as Germany is an exporter country…).

          • Thanks for sharing those insights about the US economy! I’ve been mostly focused on jobs and inflation so it helps to see the other parts of the picture.

            That’s also what I’m currently thinking about the EUR move. The unwinding of the bearish positions has been going on for at least three days already and I can’t help but wonder if the downtrend will continue or if a reversal is starting…

        • Looks like we’re seeing a lot of moves from the commodity currencies these days! Think these are just opportunities to reestablish a bearish EUR position at much better prices later on or is it the start of a reversal?

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