Euro slammed as ECB President Draghi signals additional QE coming in December

Enrique Díaz-Álvarez26/Oct/2015Currency Updates

As we had been forecasting for some time, on Thursday the ECB all but announced that it intends to increase its quantitative easing programme. The Euro fell sharply against the US Dollar as soon as the news hit the wire, and continued falling all the way into Friday’s New York close.

In fact, the Euro fell to lows not seen since the summer. It’s now moved into a position much more in line with both our internal forecasts and Bloomberg’s composite.

Given the size and duration of the QE programme will be announced in December, most would assume a more bearish outlook for the common currency.

The common currency dragged down all the other European currencies, which ended the week between 2.5% and 3.5% lower against the Dollar. The British Pound held up better than most, limiting its losses to just 1% against the Greenback and actually managing to recover some of its recent losses against the Euro.

Both Sterling and USD had a fairly strong week in terms of data and, especially for the USD, this should provide the much needed impetus for FOMC members to vote in favour of a rate hike in the near future. Should this be the case, the USD is expected to strengthen against the majority of currencies.

Last week’s major announcement from the ECB brings back into focus the growing gap between monetary policies across the Atlantic, and we expect to see the Euro resume its downward trend against most major currencies.

Major currencies in detail


Last week saw a very strong upward surprise in UK retail sales numbers for September. The headline number was up a huge 1.9% for the month. The annualised number is now growing in the 6-7% range, suggesting that falling unemployment and healthy pay growth are finally filtering through to increased consumer confidence and spending.

Although retail sales are notoriously volatile and prone to revisions, last week’s data supports our view for healthy UK growth in the 2-3% range and a first Bank of England interest rate hike in the second quarter of 2015, sooner than the market expects.


We’d been talking for some time about the urgent need for action from Eurozone monetary authorities.

Inflation is negative, with the ECB failing to meet its target of “close to, but below 2%” since early 2013. Even the ECB’s own inflation forecasts, which have had a clear optimistic bias for a long time, now indicate inflation will return to target no earlier than 2018.

On Thursday, as we had indicated in previous posts, the ECB finally reacted to this, and other downside risks, and all but announced that the December meeting will introduce additional monetary easing measures. Not only will there be an increase in QE, which has been in place since March 2015, but further interest rate cuts are also on the cards.

It’s notable that the ECB dovishness came in a week where economic data was modestly positive. The key indicator of business confidence, the composite PMI, rose slightly in October, a sign that the slowdown in China is yet to affect the Eurozone economy as a whole.

Lending conditions also continue to ease, as the QE programme starts to have some impact in the real economy. Nevertheless, it is hard to see the Euro rallying sustainably against other major currencies as the ECB gets ready to pump further monetary stimulus into the markets.


We saw very strong data out of the US housing market last week. Both housing starts and the leading indicator of new housing permits granted appear to have risen very strongly in the third quarter of 2015.

The picture for third quarter GDP growth in the US is starting to clear up. Domestic demand is growing well at over 3% in annualised terms, but will be dragged down by a currency-impacted poor trade performance and some degree of inventory correction. Overall we expect the number to come in around trend, somewhere near 2%.

This modestly positive performance, combined with the rebound we expect to see in job creation towards the 200,000 per month mark, should provide enough cover for the majority of FOMC members to vote for an interest rate hike at the December meeting.


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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.