A research by Stefano Fugazzi (ABC Economics) – Quantitative easing (QE) is an unconventional form of monetary policy where a Central Bank creates new money electronically to buy financial assets, like government bonds. This process aims to directly increase private sector spending in the economy and return inflation to target.
Quantitative easing was first used by the Bank of Japan (BOJ) to fight domestic deflation in the early 2000s. However, since the advent of the global financial crisis of 2007–08, similar policies have been used by the United States (FED), the United Kingdom (BOE), and the Eurozone (ECB).
The purpose of this paper is to quantify how forex markets – with particular reference to EUR/USD, GBP/USD and CHF/USD – reacted to the FED’s four QE operations.
FED QE announcements
QE1 was announced on November 25, 2008 when the Federal Reserve started buying $600 billion in mortgage-backed securities.
A further monetary stimulus operation was announced on November 3, 2010 (QE2) and was followed by a third wave of monetary easing which was split into two legs (QE 3.1 on September 13, 2012 and QE 3.2 on December 12, 2012).
From the charts reported thereafter in this document, you will notice that on average:
- EUR/USD. The euro strengthens against the dollar (+0,66% on day 1 and +1,67% average increase over a 3-day period) following the announcement.
- GBP/USD. The sterling weakens against the dollar (-0,39% on day 1 and -1,29% average decrease over a 3-day period) following the announcement.
- CHF/USD. The Swiss Franc reacted positively to the first operation and negatively thereafter.
Stefano Fugazzi (ABC Economics) – February 22, 2015