Piotr Matys, EM FX Strategist at Rabobank, notes that the ECB revealed a comprehensive package of easing measures to boost inflation and economic activity in the Eurozone. Key Quotes “Key measures include a 10bp cut in the deposit rate to -0.40% and 5bp cut in the main refinancing rate to 0.00% accompanied by a new series of four targeted long-term refinancing operations (TLTRO 2) and expansion of the QE program by EUR20bn to EUR80bn a month. Initially the markets responded well to ECB’s bazooka. EUR/USD plunged to an intraday low of 1.0822 (the lowest level since the beginning of February) and risky assets rallied. It didn’t last. What happened over the next few hours was a total carnage. EUR/USD surged beyond the 1.12 level after Draghi admitted that the ECB has no intentions to cut interest rates further. Almost 400 points range (!) is the widest so far this year and not far from the 457 range set on December 3 when the ECB really disappointed the markets (the main difference is that on this occasion the ECB actually exceeded expectations, at least in our view). EUR/GBP plummeted to 0.765 low only to rally to 0.785 high. We witnessed similar moves in EUR/CEEMEAs. To illustrate that, after the ECB revealed its measures EUR/TRY depreciated sharply to 3.1201, but produced a painful squeeze to almost 3.23. EUR/PLN also ended Thursday’s session higher at 4.336 fully recovering from the lowest level in more than two months of 4.2870. What now for the euro, which sets the tone for a wide set of various asset classes? ECB officials may intervene verbally in the coming days to convince the markets that the shift from cutting interest rates further in favour of the ECB’s unconventional policy tools such as Targeted Long-Term Refinancing Operations (essentially the ECB paying banks to lend to business and households) will increase the effectiveness of low interest rates that will stay “very low for a long period of time.” The damage to bearish bets against the euro, however, has been done. Those market participants, including yours truly, who went into the ECB meeting with a bearish view on the euro ended Thursday’s session calculating their losses instead of celebrating profits. The euro is still one of the main funding currencies and for that reason we are sceptical that gains in EUR/USD will prove sustainable and we would not chase EUR/CEEMEAs higher. That said, after such a massive blow as on Thursday Draghi and other ECB officials may find it even more difficult, if they choose to do so, to talk the euro down. Perhaps the US Federal Reserve will come to Draghi’s rescue and prevents EUR/USD from gaining even strong momentum? With the US economy proving somewhat resilient to the sell-off in financial markets at the beginning of the year and the USD unable to extend its last year gains, the Fed may surprise the markets with more hawkish/less dovish statement next week.” For more information, read our latest forex news.