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Euro fell half a percent after three days in a row climb as ECB announced its cautious QE move

Euro fell half a percent after three days in a row climb as ECB announced its cautious QE move

26 October 2017

The good run of the euro has abruptly came to an end on Thursday afternoon, after the European Central Bank had finally announced its decision on continuation of loose monetary policy that has been conducted for years now. The cautious move of halving the stimulus, saw EUR/USD exchange rate fell to 1.1722 dollars.

Waiting for the announcement

From the beginning of the week of October the 23rd, the common European currency had have a quite good exchange rate, as markets had been waiting for the European Central Bank’s (ECB) decision. EUR had been climbing for three days in a row, since Tuesday, growing stronger both against the US dollar, where it hit a 1-week high of 1.1820 dollars and the Swiss Franc with exchange rate EUR/CHF at 1.1690 francs. The euro was up 12.5 percent for the year in exchange rate against the US dollar. Stronger euro meant also that Swiss franc fell yet again in the currency pair of CHF/PLN to the price of 3.62 zlotys on closing of trading on Tuesday, October the 25th. It is the lowest closing exchange rate since so-called black Thursday in Poland on 15th January 2015, when the Swiss National Bank’s decision to stop defending its currency from growing stronger, saw the exchange rate of CHF rocketing for a moment to the level of 4.7 zlotys. The tendency of weak Swiss Franc has started already a week or so before, with good moods overall on financial markets making investors less eager to play it safe and buy Swiss francs. In a waiting game for the ECB’s decision, stocks all over Europe slipped a bit. Additionally, the central banks of Sweden and Norway both kept countries’ interest rates on hold.

ECB plays it safe

In fact the direction of the ECB’s decision has been known for some time – investors and experts were expecting continuation of the loose monetary policy. Though at the same time the biggest step yet in unwinding years of the quantitative easing policy was expected. What had remained a mystery was the scale of this step and exactly to what number would the stimulus of 60 billion euros per month be cut to. Some specialists had predicted a cut to 25 or even 20 billion euros. In the end, the ECB decided for a cautious move of halving its stimulus to 30 billion euros a month. It made it clear that any rise in interest rates, which are now at 0% for refinancing operations, at 0.25% for credits and at -0.4% for deposits in the central bank, is not planned in the foreseeable future. The new version of QE policy will be launched from the beginning of 2018 and will be continued through September 2018. The announcement indicated that the policy might be further prolonged after that day. The closure of the loose monetary policy has not been disclosed, as the central bank in Europe vows to keep it up until the moment when the inflation path is with accordance of the inflation target. The ECB also informed that it will continue to reinvest resources obtained from the loose monetary policy. As reaction for the news, the exchange rate of EUR/USD fell from 1.181 US dollars to 1.1722 dollars, which is a skip of half a percent. Also to buy euro in Switzerland, has become more expensive. On the contrary, stocks have risen in reaction to the ECB announcement.

Michael
ExchangeMarket.ch