ECB surprise sees Euro surge

There is an expression on the markets, that “the markets tend to move more on rumour than fact”, which was shown to be true yesterday in quite spectacular fashion. For the last month or so the ECB have been talking fairly consistently about the possibility of cutting interest rates and extending their QE program, and that there would be action in their December meeting. As a result the markets had pretty much taken it for granted that at least one of these things would happen and this has meant a very weak Euro – lowering the yield for investors and diluting the currency not being a very positive outcome for any currency after all.

However when the ECB announced their policy statement for the month yesterday it is fair to say they threw the cat amongst the pigeons in spectacular fashion. They did in fact do both of the things they had hinted they might, but critically, not to the extent anyone expected. The interest rate cut that had been anticipated, turned out not to be a cut in the main borrowing rate but simply a 0.1% cut in the deposit rate, and the extension of QE, was not hundreds of millions of extra Euros added to the program, but simply an extra 6 months tagged onto the end of the program (the fact!). As neither of these factors was particularly negative for the Euro, all of the pricing-in (moving on the rumour!) that had been happening, unwound to a massive extent – GBPEUR and USDEUR both dropped by 4 cents incredibly quickly.

We now find ourselves some way off the highs for buying Euros we had recently been experiencing, but with the big negative (!) ECB news now done and dusted, it is fair to say with a more realistic rate rather than the previously overinflated one.

There was some positivity for Sterling yesterday despite the big drop in GBPEUR in the form of better than expected construction PMI and this came through in GBPUSD which jumped up around 1%, also aided by Dollar negativity as a result of the Euro’s massive gains.

Today is all about the Dollar, with very little data of note anywhere else, and the critical non-farm payrolls due out at 13.30. A weaker figure than last time round is expected simply due to large recent gains and the time of the year, but this is not really a problem for the Dollar unless the figure is not achieved. In the absence of other critical data and with the Dollar looking to make back yesterday’s sudden losses, expect this release to be very much under the microscope.

For those of you with a Euro purchase coming up this may seem like a disaster and understandably so, but keep in mind that the current rates are still tens of percent above the buying rates seen for much of the last few years, and only a few cents below the absolute highs, so you can still secure at very positive levels. Make sure you stay in close contact with your Currency Index account manager to be kept informed of exactly what is happening and what your options are for securing your exchange rate.