FX Focus: Euro rallies against pound and dollar after ECB extends asset purchase programme

The euro rallied against the pound and the dollar on Thursday (8 September), after the European Central Bank decided to hold its benchmark interest rate at 0.0% and extend its monthly €80bn (£68bn, $90bn) asset purchase programme until the end of March 2017.

Shortly after the announcement, the common currency gained 0.82% against the pound, exchanging hands at 0.8494p and was up 0.70% against the dollar to $1.1318.

"The governing council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases," the ECB said.

It added that the asset purchase programme could continue beyond March 2017, if necessary, and in any case until the bank sees "a sustained adjustment in the path of inflation consistent with its inflation aim".

Addressing reporters shortly afterward, ECB President Mario Draghi warned the Eurozone recovery faced major obstacles, one of which was the "uncertainty" following the result of the UK referendum on the European Union.

"The euro area recovery will be dampened by subdued by foreign demand," he said. "For the time being macroeconomic changes are not substantial enough to warrant a decision to act."

Jennifer McKeown, senior European economist at Capital Economics, said the ECB had still a lot of work to do before meeting its intended target. Growth and inflation remain subdued in the Eurozone, with the latter on course to miss the bank's 2% target until 2018, having already fallen short for the past three years in a row.

"The recent rise in the euro against the US dollar could present an additional threat to the growth outlook if it continues," she said.

"Against that backdrop, the Bank will need to provide extra policy stimulus before long. We suspect that it will announce a six-month extension of the Asset Purchase Programme in December if not before and it might yet need to increase the pace of purchases too."

Elsewhere, the pound was broadly flat against the dollar, while the greenback slid 0.09% against the yen to ¥101.65, as investors continue to grow sceptical the Bank of Japan may implement drastic easing measures at its policy meeting later this month.