Euro Sharply Drops Against US Dollar as ECB Lengthens Its Bond Purchases

The euro experienced volatile movements against the US dollar on Thursday as investor read into the European Central Bank’s policy announcement earlier today. During its latest policy meeting, the central bank decided to extend the period for which its bond purchase program will last.

The European Central Bank said in a press release that its Governing Council decided to keep its interest rates unchanged, in line with expectations. The council also decided to maintain its asset purchase program at the current monthly pace of â‚¬80 billion until the end of March 2017.

The program will be reduced to â‚¬60 billion starting from April 2017, and its running period will be extended to December 2017. The press release did not rule out the possibility of lengthening the program’s period further.

The euro initially rose following the press release, as investors thought that the European Central Bank is reducing its quantitative easing. However, they quickly realized that the net result of the bank’s decisions is negative for the euro, since extending the easing program to December is more than the six month extension that markets expected. This quickly forced the euro down against its major peers, including the US dollar.

European Central Bank President Mario Draghi held a Q&A conference following the announcement, during which he said that the central bank is comfortable buying bonds with yields lower than the bank’s deposit rate at minus 0.4%.

All eyes will now be on the US Federal Reserve as it decides its interest rates in its meeting on Wednesday. Fed futures prices, which investors use to take bets on the possible future changes in interest rates, showed a 97.2% probability of an interest rate hike, according to the CME Group FedWatch tool.

EUR/USD traded at 1.0605 as of 16:05 GMT on Thursday, the pair’s lowest level since December 5. EUR/USD briefly rose to 1.0865 at 12:45 GMT, after opening trading today at 1.0752.

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