European Central Bank Announce QE

Today's Highlights

European Central Bank Announce QE

FX Market Overview

So the European Central Bank have joined the QE party, following in the footsteps of the Bank of Japan, Bank of England and the US Federal Reserve. It is quite a change in sentiment from 2008/2009 when the ECB confidently stated that this was an anglicized financial crisis and they would not need to adopt such measures. Admittedly, this was under the stewardship of Mario Draghi’s predecessor Jean Claude-Trichet but it did cause a few rye smiles around our dealing desk.

Having spent much of the week trying to pour some cold water on the rampant speculation that was doing the rounds in the market, the ECB actually surprised the markets by unveiling a bigger stimulus package than was expected. Many market analysts expected the ECB to announce a €50B per month stimulus package, so the €60B per month was more than expected and would equate to an injection of over €1 Trillion during the life of the program (currently set to end in Sept 2016).

This move was aimed at combating inflation and would continue until “a sustained adjustment in the path of inflation” is seen. Personally I think the ECB will discover pretty quickly that a trillion is not what it used to be, crazy thing to say seeing as the number is so huge it is difficult to comprehend, but as the Federal Reserve discovered by the end of its QE program there is a law of diminishing returns at play. In the latter stages of the Fed’s program the announcement of further QE was having limited (if any) impact on equities markets but the threat of removing it would send markets into a tailspin.

Yesterday, this was apparent as stock markets (Germany’s DAX and Frances CAC) both turned negative in the aftermath of the announcement.

The ECB’s move shows the divergence between central bank policy around the world with the Fed and BOE both refraining from adding any more stimulus and having one eye on a suitable exit strategy.
GBP/EUR traded to the highest levels we have seen since Oct 2008 and EURUSD traded to a decade low following the announcement. There has been volatility throughout the currency markets making automated orders a sensible play at this stage.