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Mario Draghi and the EU prepare to go ‘all in’ over QE

Thursday 22 January 2015
12:45pm London time (13:45 Frankfurt): ECB monetary policy announcement
13:30pm London time (14:30 Frankfurt): ECB president Draghi press conference
What is QE?
An unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.
How does it work?
Typically, a central bank targets the supply of money by buying or selling government bonds. When the bank seeks to promote economic growth, it buys government bonds, which lowers short-term interest rates and increases the money supply. This strategy loses effectiveness when interest rates approach zero, forcing banks to try other strategies in order to stimulate the economy. QE targets commercial bank and private sector assets instead, and attempts to spur economic growth by encouraging banks to lend money.
The rumours
Yesterday the WSJ and Bloomberg sited sources that said €50bn a month of QE would be started in March this year and run through to 2016. This could then be as much as €1.2 trillion!
The range
Low = €500bn of QE
Media = €750bn
Top = €1tn
Ruffley’s top tip
This is where the information is hard to interpret. The market acted very favourably over the rumoured €50bn per month over two years – this tops the high of the estimate. However this was over two years. Look out for the ECB giving clarity this afternoon. It is not IF the ECB will introduce QE but by HOW MUCH. Pay particular care to analyse the AMOUNT OF QE and the TIME in which it will be injected into the markets.
The effect
This release sent the major indices up sharply over 50 points. The EUR/USD also got hit and sold off roughly the same. Almost 30 minutes after the rumour the markets were back to parity, which was an interesting insight into how the market feels about QE and the EU in general.
The trend for the indices continued bullish for the rest of the day. With the surprise cut of Canadian interest rates and people preparing for the QE glut of free money it seems the smart money is long the major indices for now.

Steve Ruffley
Chief Market Strategist- InterTrader

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