FX round-up: Euro takes a tumble as ECB halves stimulus programme

The euro took a tumble against the dollar and fell versus the pound on Thursday after the European Central bank said it will cut the size of its asset purchases and extend the programme until next September.

The single currency fell 0.6% against the greenback immediately after the announcement and by 1500 BST had extended losses to trade down 0.8% to 1.1720. Against the pound, meanwhile, the euro was fetching 0.8886, down 0.3%.

The ECB stood pat on interest rates, as expected, and announced its intention to halve the pace of asset purchases to €30bn a month as of January 2018. In addition, the central bank extended the programme for a further nine months from that date “or beyond, if necessary and in any case until the Governing Council sees €30bn as a sustained adjustment in the path of inflation consistent with its inflation aim”.

If necessary, the ECB also said it stood ready to increase the size of the APP again.

Manuel Ortiz-Olave, market analyst at Monex Europe, pointed out that extending the asset purchases to September 2018 was the base case scenario, but leaving the end date open to possible extensions in duration and size beyond September next year is what sent the euro to fresh daily lows against the dollar and the pound.

"Doves and hawks in the ECB’s Governing Council were well divided, and both camps have good arguments to defend their stances. Hawks argue that the current economic strength of the euro area diminishes the need for an ultra-loose monetary policy. The unemployment rate has fallen to 9.17% in the eurozone, the lowest it has been since Q2 2009, and the region has recorded 17 consecutive quarters of growth. On the flip side, doves argue that inflation remains stubbornly below the 2% target, being the unique mandate of the ECB.

"Therefore, the main take away from the decision just announced is the flexibility to extend both in size and duration the QE programme, which has been received as a dovish signal, as the ECB does not commit to a fixed end date.”

Kathleen Brooks, research director at City Index, said: “Tapering was the key part of today’s statement, however the ECB said all of the right things to placate the doves on the board. We believe that the tapering announcement itself should be considered euro positive, however, since the single currency is currently the best performer versus the G10 so far this year, it is probably due a break from appreciation.

“Even so, we still think that the NZD, GBP and Scandi currencies remain vulnerable to further euro strength later this year. In fact, the euro still remains higher vs/ the NOK and SEK today, which gives some weight to the view that the ECB may only have a temporary dampening impact on the euro in the coming days.”

ETX Capital analyst Neil Wilson said that with the Fed looking more hawkish and US Treasury yields pushing higher, the market might start taking the US central bank more seriously on rate hikes, which could spark a reversal in the EURUSD rally seen in 2017.

Meanwhile, sterling was under pressure - trading down 0.5% against the dollar at 1.3192 - after industry surveys revealed that UK retail sales are tumbling faster than at any time since the height of the financial crisis as industry pay rises faster than the rest of the economy.

In the year to October, retail sales plummeted to -36, the lowest since March 2009, according to the Confederation of British Industry's distributive trades survey, which was down from a +42 the month before and missed expectations for further expansion.

Meanwhile, a survey from the British Retail Consortium also out earlier showed that the industry saw pay rise at a faster rate than the rest of the economy. Average hourly pay in retail was up 4.6% in 2017, compared to 2.9% growth for the UK economy as a whole, the BRC said.