Euro Surges as Scale of ECB Stimulus Boost Disappoints Bears

  • ECB cuts deposit rate 10 basis points; extends QE to March '17
  • Traders refocus on U.S. jobs report due for release on Friday

Here's Why the Euro Spiked Today

The euro jumped the most against the dollar since 2009 after the scale of the European Central Bank’s stimulus measures disappointed investors.

The shared currency rose versus all of its major peers after the ECB extended its quantitative-easing program through March 2017 and reduced the deposit rate by 10 basis points, or 0.10 percentage point, to minus 0.3 percent. The dollar slipped as Federal Reserve Chair Janet Yellen emphasized the gradual path of interest-rate increases, before a jobs report on Friday that may boost the likelihood of the U.S.’s first rate rise since 2006 this month.

After ECB President Mario Draghi promised to “do what we must” to raise lackluster inflation in the euro area, speculation raged surrounding the probable extent of rate cuts and extensions to the length and magnitude of officials’ stimulus program. That meant a painful day for traders who’d boosted bets on euro weakness to the highest since May.

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“It’s exactly what you would expect to see when a crowded trade gets disappointed,” said Matt Weller, an analyst at Gain Capital Holdings Inc.’s Forex.com unit in Grand Rapids, Michigan. However, “it does remove what perhaps was one of the few stumbling blocks left between now and the Federal Reserve potentially -- and I would say, likely -- raising interest rates in two weeks. The only other major hurdle is tomorrow’s nonfarm payrolls report.”

The euro rose 3.1 percent to $1.0940 as of 5 p.m. New York time, climbing the most since March 2009. The shared currency added 2.5 percent to 134.13 yen.

Missed Expectations

ECB officials extended their bond-buying purchases through at least March 2017, bringing the size of the program to 1.5 trillion euros ($1.6 trillion) from 1.1 trillion euros, while retaining the pace at 60 billion euros per month. The program will be expanded to include debt issued by regional and local governments in the currency bloc, Draghi said at a press conference in Frankfurt. The QE plan had been due to expire next September.

By contrast, the Fed is moving toward raising rates, with Yellen signaling the economy is ready for liftoff as soon as this month. A jobs report on Friday will probably show American companies added 200,000 workers in November, down from 271,000 the month before, according to the median estimate of 90 analysts compiled by Bloomberg News.

Hedge funds piled on wagers against the euro in anticipation on more aggressive easing from the ECB, lifting speculative positioning to the highest since May. Those trades are now being unwound, with Deutsche Bank AG recommending investors close bets on a weaker euro after the ECB’s announcement.

“The market was obviously priced in for the worst case on the euro ahead of the ECB announcement,” said Minh Trang, a senior foreign-exchange trader at Silicon Valley Bank in Santa Clara, California. “Traders are now covering their positions given the comments were not as bearish regarding QE measures.”

The central bank’s stimulus measures “needed to be re-calibrated so as to have a faster convergence of our inflation objective,” Draghi said told reporters. The ECB is “willing and able” to act further if needed, he said.

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