Euro Surges After Report ECB Considering a QE 'Taper'

Over the past couple of months, the capital markets have been especially antsy on the topic of the limits of monetary policy. A report this morning suggesting that maybe one key central bank is feeling the same way sent the euro surging.

Forex markets were already under some pressure, with the U.K. pound hitting a 31-year low this morning, when a second, sharp wave of selling landed abruptly on Tuesday, and it was especially acute in the euro-dollar trade. What sparked it apparently was a Bloomberg report citing unnamed ECB officials, and saying that the European Central Bank was building a "consensus" to taper its QE asset-buying program.

According to Bloomberg's report, the bank would start winding down its bond buying by $11 billion a month, ahead of the program's currently scheduled end in March 2017. If that is the case, it would be similar to what the Federal Reserve did with its QE3 program. We have not confirmed the veracity of the Bloomberg report, and ECB President Mario Draghi has consistently said he would extend it past next March if necessary.

Also on Tuesday, two ECB officials did publicly make comments casting doubt on the value of negative rates. That follows on actions the Bank of Japan took last month that were widely interpreted as a subtle abandonment of its own negative rates policy.

The move in the euro was fast and violent. Just before noon, it spiked from 1.1155 to 1.1230 in about 15 minutes after the Bloomberg report hit. After that it eased back down to around 1.1925. It may not sound like much, but it's a big move in a short space for a currency as widely traded as the euro.

The wave spread into the bond market, too, sending the U.S. 10-year Treasury note's yield to a fresh session high at 1.67%, from 1.62% yesterday. The selling has moved into equities, too, with the DJIA off 100 points, and the S&P 500 down 11 points at 2150.

In September the ECB disappointed the market by not choosing to expand its QE program, counter to expectations it would do just that. The wider question for the markets is this: are central banks getting weary of their own monetary policies?

It's hard to know exactly what central bankers are thinking, but they have consistently over the years talked about the limits of central bank policy, and hawkish members of the banks have warned about the dangers that central bank policy can do to the capital markets. Indeed, the surprisingly negative reaction to negative rates seems to have fueled some of this. It's something that Janus Capital 's Bill Gross was warning about just this morning.