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UPDATED: EUR/USD Surges as ECB Cuts Deposit Rate, Few Changes to QE

UPDATED: EUR/USD Surges as ECB Cuts Deposit Rate, Few Changes to QE

Talking Points

- ECB cuts deposit rate by -10-bps, meeting marketing expectations.

- QE program enhancement limited to extension to March 2017.

- EUR/USD surges over +300-pips around the ECB.

UPDATED (13:45 GMT): This article has been updated to reflect ECB President Mario Draghi's press conference and the release of the staff projections. This article has been amended from its original form to incorporate this information.

Ahead of the meeting, market expectations were elevated for at least a 10-bps rate cut, an extension of the QE program, and an increase in the QE program's run rate. Chalk this one up as a major disappointment: the ECB failed to deliver on high expectations for more easing, setting up EUR/USD for one of its largest single day moves of the year (second largest next to March 18, 2015, when it gained +2.55%; at the time of writing, EUR/USD had gain +1.91% today).

As noted below in the original market alert, the ECB did indeed deliver on the expectation for a 10-bps rate cut; however, seeing as how markets had immediately priced this in going back to October 22, the lack of a deeper cut has proved disappointing.

Likewise, with only one QE enhancement undertaken - the life of the program was extended to March 2017, while the run rate was held at €60 billion per month - EUR/USD has been sent off to the races. Contributing to the dovish disappointment was a lack of significant downgrades to the ECB's staff projections.

Going into the meeting, we felt that signficant downgrades here were unlikely, and our belief of a lower inflation/higher GDP mix to the forecasts proved true. Concurrently, this is chalked up to another disappointment - softer forecasters would have laid the groundwork for future action. Yet, the feedback loop makes sense: with EUR/USD trading below the ECB's NEER (first chart), the Euro itself is not a headwind to growth; so the enhanced dovish policy at the margin (only a deposit rate cut) increases the likelihood that future economic data - like GDP in 2017 and beyond - are better than previously anticipated. -CV

Here's the impact on EUR/USD so far this morning:

EUR/USD 1-minute Chart: December 3, 2015 Intraday

UPDATED: EUR/USD Surges as ECB Cuts Deposit Rate, Few Changes to QE

This is the original article.

The European Central Bank has just announced a 10 basis point rate cut to the bank’s deposit rate. This will bring the ECB Deposit rate down to -.3% from -.2%, and will go into effect on December 9th.

This morning’s release was not without drama. Approximately eight minutes ahead of the release, the Euro spiked higher against most major currencies, as a report came out from a major media outlet that the ECB was going to leave the deposit rate unchanged. This created a spike that saw prices in EUR/USD run higher by as much as 140 pips going into the release.

UPDATED: EUR/USD Surges as ECB Cuts Deposit Rate, Few Changes to QE

But when the data hit at 7:45 AM EST, we did get that deposit rate cut from the ECB, albeit only 10 basis points versus the expectation of a 15 basis point cut that many were looking for. So, the leaked report turned out to be false, but the Euro is still trading higher on the back of a weaker rate cut than what many were expecting.

The Euro is continuing to run higher, and the ECB press conference begins at 8:30 AM EST. This should be a fun one.

Created with Marketscope/Trading Station II; prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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