The European Central Bank or the growing possibility of a hard Brexit. Two key factors that caused the euro to strengthen against both the US dollar and the British pound in Thursday trading.
Thursday’s decision by the European Central Bank to expand securities purchases to provide the necessary liquidity to the market resulted in a strengthening of the euro against major currencies. Investors expected a much more massive boost from the ECB. It said it would extend purchases of securities (mainly bonds) until spring 2022.
The ECB also indicated that it would monitor the euro exchange rate to keep track of the possible impact of the exchange rate on the medium-term inflation outlook. The euro area inflation rate has been in negative territory for several months in a row, and so there is moderate deflation in the euro area.
But the euro has also strengthened against the British pound, helped by increased uncertainty over Brussels’ negotiations with London to hold relations after the UK leaves the European Union. Although it formally withered from it earlier this year, a transition period is running until the end of it, under which the UK still controls EU legislation and has unhindered access to the European single market. But negotiations are very complicated at the last minute.