Expectations were simply too high. That's the explanation analysts are giving for today's big market moves, including the surge in the euro currency and the plunge in eurozone stocks.
The European Central Bank cut its deposit rate 10 basis points to -0.3%, extended its QE program by six months to March 2017, and agreed to buy local and regional debt, but markets were unimpressed. In particular, some traders were hoping for monthly bond purchases to be expanded from the current rate of 60 billion euros per month.
But that didn't happen. Perhaps the ECB was held back by more hawkish members of the executive board. Or perhaps ECB President Mario Draghi wanted to keep some powder dry in case it's needed in the future.
Whatever the reason, markets were underwhelmed, and many of the crowded ECB-inspired trades of the past year were quickly unwound.
Euro ETF Surges
Perhaps the most popular of these was the short-euro/long-dollar trade.
From a low of 1.0524 today, the euro spiked as high as 1.0981 against the greenback. Likewise, the CurrencyShares Euro ETF (FXE | B-98) surged 3.2%, while the PowerShares DB US Dollar Index Bullish ETF (UUP | B-73) tanked 2.3%.
The thesis behind the short-euro trade was the divergence between the monetary policies of the Federal Reserve and the European Central Bank. With the ECB easing this month, only two weeks ahead of an anticipated interest-rate hike from the Fed, it was a no-brainer to short the euro, according to some.
At least today, that trade is experiencing a hiccup. The question is whether this is simply a blip in the larger downtrend in the euro (and an uptrend in the dollar) or a sustainable reversal. Certainly, the ECB and Fed policy remain very much divergent. Today's ECB decision, even if it was less aggressive than some had hoped, still leaves eurozone monetary policy extremely loose for at least the next 15 months.
If the Fed follows through with a December rate hike and continues to lift rates through 2016, that could put renewed pressure on the euro-dollar exchange rate.