Euro Slips as ECB Confirm it's Full Steam Ahead for Asset Purachase Programme

The ECB disappointed those hoping for a stronger Euro on October 20th by quashing rumours that the Bank was planning to slowly start withdrawing stimulus from the Eurozone economy and hinted that more easing may be delivered at the December meeting.

• Euro to Dollar exchange rate today (21-10-16): 1.0908
• Euro to Pound Sterling exchange rate: 0.8904
• Euro to Swiss Franc exchange rate: 1.0850
• Euro to Australian Dollar exchange rate: 1.4276

Policy makers at the European Central Bank (ECB) delivered their October policy decision in Frankfurt on Thursday and the reaction by the Euro suggests markets were left with no concrete takeaways concerning future policy.

The Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively.

The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.

The ECB confirmed that the monthly asset purchases of €80 billion are intended to run until the end of March 2017.

The Euro rallied temporarily and bunds sold off during the press conference after Mr Draghi said that the Governing Council did not discuss an extension of quantitative easing beyond next March and that extraordinary policy support won’t last forever.

However, the trend lower in EUR/USD extended after talk of tapering was dismissed as a, "random statement from somebody who didn't know anything about that”.

The British Pound was also able to capitalise on the Euro's weakness and is looking to close the week higher than where it started.

Scarcity of bonds to purchase in the quantitative easing programme was described as "not a problem" and if anything the "programme continues to run smoothly".

"The comments sounded quite neutral to us and, in fact, the Euro subsequently gave up all of its gains," says a client briefing from Lloyds Bank following the event.

Any moves in the Euro at this stage we would therefore attribute to positioning and technical considerations.

"The EUR/USD is set to take its guidance from global developments rather than the ECB outlook in the near term. We see more downside ahead," says Tuuli Koivu at Nordea Markets.

Societe Generale's Kit Juckes is open to the prospect of further declines in EUR/USD short-term:

"There's more room for EUR/USD to fall than bounce. Relative rates/yields suggest a move to 1.08 is about all we can expect."

Trader Kathy Lien at BK Asset Management notes the euro was trading heavy before the rate decision and at the time it looked like speculators wanted to gun for the June lows:

"When they felt that Mario Draghi's views didn't pose a huge threat to their trade, they returned to selling the currency. In other words when they realized there wasn't enough momentum for EUR/USD to hold 1.10, they viewed it as a green light to press the currency lower."

Aiming for 1.082 is analyst Karen Jones at Commerzbank:

"EUR/USD has eroded the 1.0912 24th June low and in doing so fallen into new 6 month lows. This leaves attention in the next support – namely 1.0821 the March low. Below here we target the 1.0682 32 year support line."

However, with regards to the EUR v GBP exchange rate Jones is more sanguine:

"EUR/GBP has reached the gap which was left at 0.8849. We would allow for this to be partially filled, however the currency pair remains immediately bid while above the 0.8802 support line. This support is reinforced by the .8724 August high and we look for this to hold."

Watch: Draghi gives very little away concerning future monetary policy:

Euro Pointed Downwards against the Dollar

The October meeting came as the EUR/USD traded a whisker off a two-month low of 1.0951.

The Euro therefore betrayed market suspicion that the ECB was looking to extend its programme of support to the Eurozone economy.

Analysts were in agreement that no changes to policy would be announced at this meeting but they anticipated guidance on what direction the Bank could take in the future.

When it comes to the ECB and its President Mario Draghi it is all about tone and which way they push the dial on expectations for future action.

The subtelty of it all can make the event quite a volatile one for the shared currency.

Of course there are varied opinions on what Draghi achieved:

James Athey reacts to today’s #ECB meeting – “Not Draghi’s finest hour” via @Reuters - https://t.co/4oaf0Z6lMv pic.twitter.com/KnIaVoxD0w

— Aberdeen Asset UK (@AberdeenAssetUK) October 20, 2016

We have seen over recent weeks excitable headlines about the ECB looking to slowly end its quantitative easing programme - however markets have almost completely discounted this headline and have sold the currency instead.

A prevalent expectation is that the ECB will in fact extend its QE programme by six months at the December meeting; there was a chance the groundwork for such a decisionwould be laid out at October's meeting.

Some in the market believe this was indeed conveyed and the EUR/USD could be headed lower towards a test of the bottom of its long-term 1.05-1.15 range.

Which of the Three Potential EUR/USD Reactions was Correct?

Ahead of the event Credit Suisse gave us three potential scenarios for the currency.

It is interesting to look at how analysts were thinking ahead of the event, digesting the outcome and then explaining the actual currency outcome.

As can be seen, option one describes the currency reaction but option two describes the ECB's tone:

1. The ECB is clear and impressively decisive about its easing intentions: we suspect this would be enough to allow for a push towards EURUSD technical support levels around 1.09. If these do break then the natural extension would be to push on towards one-year lows around 1.06 in the weeks ahead, especially if the market is also prepared to price in a resumed Fed tightening cycle with more confidence.

2. The ECB is vague about its likely next actions – this would argue against a near-term range breakout lower for EURUSD, especially if there is any form of squeeze higher in euro area rates. We would expect a move back above 1.10 towards 1.12 in this scenario.

3. The ECB validates the recent speculation in the press about tapering by pointing towards this course of action for 2017: this would likely take EURUSD back towards 1.15 over coming weeks, especially if the market is unsure about the probability of a Fed hike in December.