Euro Drops as ECB Extends Quantitative Easing Program

Early today, the Australia Bureau of Statistics (ABS) released the employment numbers for the month of May. The unemployment rate in the country fell to 5.4%, which is the lowest level since 2012. The employment change and participation rate during the month disappointed. 12K people were employed in the month, which was lower than the expected 18K while the participation rate fell by 65.5%.
Another important data came from China which released the industrial production numbers. In May, the industrial production rose at an annual rate of 6.8%, which was lower than the expected 6.9% and April’s 7.0%. At the same time, the fixed asset investment in the country rose at an annual rate of 6.1%, which was much lower than the expected 7.0%. This was the lowest rate in more than 15 years. Retail sales in the second largest economy rose by an annual rate of 8.5%, which was lower than the expected 9.6%. Again, this was the lowest growth rate since 2003. The weakening China fundamentals could be attributed to the ongoing global challenges with the United States.

The Office of National Statistics (ONS) released the retail sales data from the United Kingdom. The numbers showed that retail sales increased in May by 1.3%. This was higher than the 0.5% which was expected. The sales grew by an annual rate of 3.9%, which was much higher than the expected 2.4%. The core retail sales increased at an annualized rate of 4.4%, which was higher than the expected 2.5%. The surge in the retail sales was likely because of the royal wedding, which happened in May. Initially, the GBP/USD pair jumped but later dropped as shown below.

The biggest news today was from the ECB, which was meeting to make a decision on the interest rates. The central bank left interest rates unchanged which was expected. Traders were however looking forward to the ECB statement on quantitative easing and the pace of future rate hikes.

The euro – which was initially rising against its major peers – fell after the ECB made its decision. The EUR/USD reached the 1.1771 level as shown below.

The decline on the euro came after the officials extended the duration for unwinding the QE. Initially, the ECB had committed to end the QE in September this year. A rate hike would have come shortly afterwards. In today’s statement, the officials said that they would start unwinding the QE in September with the final purchase being in December. The rate hike will come probably at the summer in the coming year. In the statement, the officials said:
The Governing Council anticipates that, after September 2018, subject to incoming data confirming the Governing Council’s medium-term inflation outlook, the monthly pace of the net asset purchases will be reduced to €15 billion until the end of December 2018 and that net purchases will then end.
On a rate hike, the officials said:
The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path.

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