(Kitco News) - Although European Central Bank (ECB) President Mario Draghi doesn’t think there were any problems with his committee’s communication strategy leading up to Thursday’s monetary policy announcement, the market and many analysts would beg to differ.
The European Central Bank eased its monetary policy, dropping its deposit rate to negative 0.30% from negative 0.20% on Thursday. It also tweaked its quantitative easing strategy by prolonging the program to March 2017; however, because of high expectations leading up to the meeting, many analysts and traders did not think the measures were enough. In the wake of the announcement, the euro gained almost 3% against the U.S. dollar, with the EUR/USD currently trading at 1.09264.
Gold prices in euros saw a dramatic drop as the single currency rallied. Spot XAU/EUR last traded at $973.92 an ounce, down around 1.8% on the day.
“Chalk this one up as a major disappointment: the ECB failed to deliver on high expectations for more easing, setting up EUR/USD for one of its largest single day moves of the year,” said Christopher Vecchio, Currency Analyst at DailyFX.
Currency analysts at Brown Brothers Harriman said in a note to clients that the “profound” market disappointed has been a rarity in regards toECB action during Draghi’s tenure.
“Market participants knew that volatility would rise today with the ECB meeting. What they got was far worse than could have been anticipated,” they said.
BBH noted that the market confusion started before the rate announcement and Draghi’s press conference; The Financial Times erroneously posted aa headline, saying the ECB had left rates unchanged, before the actual release.
Jonathan Loynes, chief European economist at Capital Economics said the ECB’s credibility could now be on the line.
“The ECB has comprehensively failed to live up to its own hype and markets and forecasters will take future communications from Mr.Draghi and colleagues with a corresponding bucket of salt,” he said.
However some currency analysts are not expecting the current euro strength to last. Currency strategists at BNP Paribas said that they expect EUR/USD to head back down to the 1.06 level ahead of the Federal Reserve meeting, scheduled for December 16.
“The ECB has still delivered significant new measures, even if they fell short of elevated expectations,” they said in a research report. “Against this backdrop, we continue to favour structures benefitting from limited USD appreciation versus core currencies, and would recommend caution in chasing momentum. We continue to think EURUSD will reach parity, but only in Q3 2016,” BNP said.
By Neils Christensen of Kitco News; nchristensen@kitco.com
Follow Neils Christensen @neils_C
