Euro Slumps Against Pound, Dollar as ECB Keeps the Printing Press Running

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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.



ECB QE count: Bought €16.320bn vs €14.516bn prior

It's our weekly QE round up from the ECB

  • Total QE 1.228tn vs 1.211tn prior
  • Total covered bonds 203.7bn vs 203.4bn prior
  • Total corp bonds 49.9bn vs 48.2bn prior
  • Total ABS 22.7bn vs 22.5bn prior
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