It’s been a wild ride for the euro today. The single currency soared after the European Central Bank (ECB) released its monetary policy decisions. But it subsequently slumped as traders and investors looked beneath the headlines.
Ahead of the meeting the general expectation was that the ECB would extend its bond purchase programme beyond March 2017. The consensus view was that the central bank would continue quantitative easing until September next year. This outlook was strengthened after Italian Prime Minister Matteo Renzi lost his referendum on constitutional reform on Sunday.
However, there was a worry that the central bank may taper its purchases from the current €80 billion per month. And that’s exactly what it did. The ECB said that it would extend its bond buying from March to December 2017 (slightly longer than the September 2017 end date expected). However, it also said that it would do this at a reduced rate of €60 billion per month, down from the current €80 billion per month rate. The euro soared on the news as the computer algorithms and humanoid traders picked up on the €60 billion number and interpreted that as a cut in stimulus. But in simple mathematical terms it really isn’t. After all, if the consensus expectation was for a six month extension of the €80 billion per month bond purchase programme then we’re talking about €480 billion of extra stimulus (€80 billion x 6 months). But instead the ECB extended the programme by 9 months while reducing its purchases to €60 billion over this period. So, that’s €540 billion of additional stimulus (€60 billion x 9 months). Once traders had done their sums the euro gave back its gains, and more.
Overall the changes in the ECB’s quantitative easing programme didn’t appear to be a massive deal. But it’s also a question of perception. There’s an argument that says that the ECB is now closer to winding down its programme of monetary stimulus than many investors had expected. But the central bank also covered itself by saying that "if the outlook becomes less favourable or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation, the Governing Council intends to increase the programme in terms of size and/or duration."
The euro fell further as ECB President Mario Draghi began to deliver his prepared comments ahead of his press conference. Investors and traders paid more heed to Mario Draghi’s assurance that the ECB was prepared to increase its bond buying programme if required as he emphasised that risks to Euro zone growth were still tilted to the downside.
Looking at a longer-term chart of the EURUSD we can see that the area around 1.0500 is crucial as support. It has now tested this area on four separate occasions since March 2015. A break and close below here on a weekly chart could easily open up the prospect of a move to parity and below. However, much could now depend on next week’s Federal Reserve meeting and the FOMC’s outlook for future monetary tightening.
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