Investment Clock insights

ECB extends QE; market expected more

Ian Kernohan

3 December 2015

Expectations were for further easing, and the  European Central Bank (ECB) did not disappoint on the cut to the deposit rate. However, market reaction suggests that investors also expected the monthly purchase amount to rise.  One of the major transmission mechanisms of ECB Quantitative Easing (QE) comes via the currency, and although there has been a knee jerk upward movement in the euro today, we would expect the currency to come under downward pressure again, as the US Federal Reserve (Fed) begin to raise rates.

Even after today’s spike, the euro remains around 14% below its level of 12 months ago, and still below the level seen at the time of the last ECB meeting in October. The eurozone has been a beneficiary of the shift in the terms of trade between energy producers and consumers. Moreover, with growth in the region still supported by very easy monetary policy and currency weakness, a range of business surveys and monetary data now suggest that GDP growth could surprise on the upside next year.

The chart below suggests that loose monetary policy has succeeded in raising GDP growth prospectus for 2016, even before the extra measures announced today. While mindful of downside risks, we are optimistic on the economic outlook, and continue to favour eurozone equities in our multi strategy funds, hedging the currency exposure where appropriate.

Figure: Euro area real M1 growth as a lead indicator

The value of your investment and the income from it is not guaranteed and can fall as well as rise. This article is for professional customers only. The views expressed are the author’s own and do not constitute investment advice.