Euro tumbles to three month low after ECB extends QE programme

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27 October 2017

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Euro slumped by well over one percent against the US Dollar to its lowest level since mid-July on Thursday after the ECB extended its QE programme and a report from Politico suggested that Janet Yellen was unlikely to continue as Fed chair once her term expired.

s expected, the ECB announced during its meeting yesterday that it will continue its asset purchasing programme beyond the previous December 2017 end date. The QE programme will be extended by an additional nine months and will now run until at least September 2018. While in line with our expectations, this is slightly longer than the six months that the majority of the market had anticipated. In addition, the central bank will cut the pace of its asset purchases by half in January from 60 billion a month to just 30 billion, right in line with consensus.

Importantly for currency markets was the commitment to keep rates at current negative levels ‘for an extended period of time, and well past the horizon of net asset purchases’. This, together with relatively downbeat comments on the need for ‘sustained accommodation’ in order to push it upwards to the ECB target, knocked the Euro down sharply.

Neither the decision nor the communications change our view that the ECB is going to proceed very cautiously given the lack of a pickup in inflation data. Any increases in rates (the key to currency movements) will be delayed until well into 2019, and the widening rate differential with the US should pressure the EUR/USD rate lower.

US Dollar index soars after Yellen reportedly out of Fed race

The US Dollar index jumped to its strongest position since around mid-July this morning after the ECB meeting and a report from Politico that claimed Janet Yellen would not continue as Fed chair once her term ended.

The report suggested that Trump’s search for a new central bank head had come down to Fed Governor Powell and Stanford economist John Taylor. Taylor, in particular, is seen as a much more hawkish alternative to Yellen and his appointment could accelerate the pace of Fed hikes in 2018. Moreover, we had the news that the US House of Representatives had passed the budget blueprint for the 2018 fiscal year in a narrow 216-212 vote. This could allow Trump to force through his long awaited tax cuts within the coming months.

Investors will quickly shift their attention to this afternoon’s US GDP numbers which are expected to show that the world’s largest economy expanded by a relatively healthy 2.5% annualised in the third quarter.

Sterling gives up gains following GDP release

The boost to Sterling from Wednesday’s encouraging growth data proved short lived yesterday, suggesting that the immediate upward move in the currency was somewhat of an overreaction. The Pound retraced around two-thirds of its advances against the Dollar during London trading, before this morning sinking to its weakest position in three weeks.

Today should be another quiet day in terms of economic announcements within the UK, with investors instead weighing up the likelihood of a rate hike from the Bank of England next week.