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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.