EUR/USD: ECB easing has boosted the euro

Europe's Central Bank held its regular meeting on Thursday in unusual conditions - in an empty room and answering "virtual" questions from journalists. But these strange conditions did not prevent the ECB from sending a strong message to the financial markets, a message that pushed the euro even higher.

It relaxed the terms of its TLTRO-III (Targeted Long-Term Refinancing Operations) programme, offering a 50 basis point rate cut from next month through June of next year. It also introduced a new program designed to further assist the continent - PELTRO (Pandemic Emergency Longer-Term Refinancing Operations), as a complementary tool to the already easy and user-friendly Outright Monetary Transactions (OMT) position already present in its plan.

These operations may not seem attractive to the ordinary trader, but the announcement has created increased volatility on EUR pairs. Shortly after the end of the ECB press conference, the euro soared across the board, as both the eurodoallar and the EUR/JPY over-performed.

The ECB's monetary policy announcement follows the Fed's statement and press conference of Wednesday. The Fed reiterated its willingness to extend swap lines on the USD if necessary. The ECB signals something similar - the willingness to do everything in its power to fight the virus situation by providing access to cheap funds.

So why did the EUR take off if the Central Bank issued an ambiguous message? The answer lies in the way currency markets are evolving - it is not a single currency, but an exchange rate.

The monetary policy easing measures announced by the Central Bank are aggressive and welcome, but they overshadow what the Fed is doing. As a result, the exchange rate, or eurodollar, almost reached its highest level of April at the time of the announcement. Despite the Central Bank's easing, traders quickly realised that the USD is in an even more vulnerable position and sold it off in all areas.

Another thing helped fuel the euro's rally - the day coincided with the end of the month. The last day of the trading month is always responsible for increased volatility, especially during the hours close to the main London fixing.

In addition, as Friday was a bank holiday in many major markets, traders didn't want to leave anything to chance over the weekend. Finally, the euro triggered a few stops on the upside - which is normal, given that it traded in a bearish tone for most of April, and especially during the last trading week.