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Why the Euro Slumped on Dovish ECB Statement

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Euro fell 2% after ECB hinted at further easing

The euro fell by more than 2% against the US dollar after the ECB (European Central Bank) meeting on October 22, 2015. ECB chief, Mario Draghi, signaled that the central bank could expand the quantitative easing program in the meetings ahead. The ECB maintained the rates at near zero levels while the deposit rates for banks for holding reserves remained at -0.2%. The euro had been gaining weight in the recent months due to the unwinding of the carry trade in emerging economies, which has been thwarting inflation levels from catching up.

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European powerhouses like Germany and France have been releasing a string of sluggish economic data, which has been a cause of concern for the ECB. The euro has been falling on dovish statements by ECB members Luis Maria Linde and Ewald Nowotny for the past few trading sessions. Read Euro Exhibits Sharp Correction on ECB Member’s Comments and Euro Trading in a Range ahead of ECB Monetary Policy for more information.

ECB plans to wait and assess

The ECB mentioned that inflation levels have been low as a result of weak crude prices globally. It isn’t clear how far the effect of a slowdown in emerging countries will last in the Eurozone. Draghi stated that the central authority will be maintaining a “wait and assess” strategy before expanding the monetary stimulus until September 2016 in the next meeting in early December. Considering the base effect, the ECB will assess inflation levels before making the call.

Impact on the market

Looking at the October 22 performance of currency-based ETFs linked to the euro, the ProShares UltraShort Euro ETF (EUO), which is inversely linked to the euro, finished positively at 4.1%. In contrast, the Guggenheim Currency Shares Euro ETF (FXE), which has a direct relation to the euro, ended on a negative note at 2.0%.

The ADRs (American depositary receipts) from the Eurozone, especially banking ADRs, were trading on a positive note as Deutsche Bank (DB) and Banco Santander (SAN) ended higher by 1.7% and 1.9%, respectively. National Bank of Greece (NBG) rose by 3.9%.

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