The European Central Bank (ECB) held its regular meeting yesterday in unusual conditions – in an empty room and taking “virtual” questions from financial journalists. But the strange conditions did not stop the ECB from sending a powerful message to financial markets, a message that sent the Euro higher.
It loosened the terms on its TLTRO-III program (Targeted Long-Term Refinancing Operations), offering a 50bp rate discount from June 2020 to June 2021. Also, it introduced a new program designed to further help the Euro area – the PELTRO (Pandemic Emergency Longer-Term Refinancing Operations), as a tool to complement the already easy stance and to use instead of the Outright Monetary Transactions (OMT) already present in its toolbox.
These may not sound interesting for the everyday trader, but the announcement created heightened volatility on the Euro pairs. Shortly after the ECB presser ended, Euro surged across the board, with the EURUSD and EURJPY outperforming.
The ECB monetary policy announcement follows the Fed’s statement and press conference the day before. The Fed reiterated its willingness to expand the dollar swap lines if necessary, the ECB signals something similar – the readiness to do everything in its power to fight the coronavirus health crisis by providing access to cheap money.
So why did the Euro surge if the ECB delivered a dovish message? The answer comes from the way the currency markets move – it is not about a single currency, but an exchange rate.
As aggressive and welcome the easing monetary policy measures announced by the ECB, they dwarf in size what the Fed is doing. As such, the exchange rate, or the EURUSD, surged to almost the high of the month on the announcement. Despite the ECB easing, traders quickly noted that the dollar is in an even more vulnerable position and sold it across the board.
One other thing helped fuel the Euro rally – the day coincided with the end of the month. The last day of the trading month is always responsible for an increase in volatility, especially during the hours close to the main London fixing.
On top of that, today being a bank holiday, market participants wanted to leave nothing at chance over the weekend. Finally, the Euro tripped some stops on its move higher – only normal, considering the fact that it traded with a bearish tone most of the month, and especially during the last trading week.