The ECB announced wider than expected stimulus measures to
boost growth and inflation in March. However, it was President Mario Draghi's
comments that triggered the roller coaster movement in the markets. The EUR/USD initially dropped to a 6-week low of 1.082, before rallying to a high of
1.1218.
The Europe Central Bank lowered the main refi rate by -5 bps
to 0%, the deposit rate by -10 bps to -0.4% and the marginal lending facility
rate by -5 bps to 0.25%. It also expanded the size of monthly asset purchases
to 80B euro from 60B euro with high quality (investment grade) corporate bonds
becoming eligible for regular purchases. Further to this, the ECB introduced 4
TLTROs (TLTRO II), each with a maturity of 4 years, starting in June 2016.
Risk appetite soared immediately after the announcement, however, we saw a strong
reversal as Draghi, during the press conference, signaled that the ECB might
not ease further. He suggested, 'rates will stay low, very low, for a long
period of time and well past the horizon of our purchases" and hinted that
they do not anticipate that it will be necessary to reduce rates further.
Despite the initial negative reaction, traders started to
understand that the new stimulus measures indicated that the ECB is committed
to use almost all of its tools to fight against deflation and that the final
impact of the package is positive.
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