EUR Tumbles Post-ECB; Does New QE Program Live Up to Hype?
- Trend since December 17 continues to persist in EURUSD.
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- See the DailyFX Economic Calendar for Friday, January 23, 2015.
‘Disappointment’ is a phrase you’ve probably heard associated with the ECB in recent months, as market participants have been left disappointed by the lack of substantive policy decisions undertaken to fight the region’s low growth, disinflationary rut. Yet yesterday, despite all of the hoopla around the ECB for the past six-weeks, President Mario Draghi delivered.
Going into the event, the hype was undoubtedly high: the European Court of Justice cleared the way for QE with its decision last week; the Swiss National Bank’s decision to abruptly remove the EURCHF floor ahead of an expected ECB QE announcement; the ECB’s balance sheet being relatively unchanged for two months; and inflation expectations plummeting to fresh multi-year lows.
There was a fairly high bar established for disappointment as well, thanks to Wednesday’s ‘leak’ that clued traders into the size of the program: €50bn/month through the end of 2016 – roughly a €1.1 trillion balance sheet expansion. The exact measures taken on Thursday, suffice to say, have lived up to the hype and cleared Wednesday’s hurdle. The ECB’s decision to announce a €60bn/month program through September 2016 not only means that the ECB will be inflating its balance sheet faster than expected, it will also be increasing the balance sheet beyond the expected aggregate total rumored mid-week.
In doing so, the ECB has given itself significant room to operate laterally within the program; the program is open-ended, allowing the ECB to push back the end date as it deems necessary – keeping the market on the hook, hoping for more QE.
Everything else is just political window dressing. The decision to keep the topside of the interest rate corridor above 0%, the decision to split the sovereign purchases 80/20 between the ECB and national central banks (NCBs), are both there to placate the more hawkish members of the board. Beyond that, the ECB has finally arrived on the scene with QE, albeit 5-years too late.
--- Written by Christopher Vecchio, Currency Strategist
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