European Central Bank president Mario Draghi. Source: IMF Staff Photo/Stephen Jaffe.

Today was the European Central Bank's turn in the spotlight at the conclusion of its October monetary policy meeting in Malta. The outcome: no actions taken. When it comes to monetary policy, however, words can speak as loud as actions. And ECB president Draghi's words were very dovish, resulting in a big spike in the dollar-euro exchange rate, though that move had largely reversed itself by Wednesday evening.



Dollar Strengthening/ Weakening
















Source: Bloomberg. Data current as of 6:05 p.m. EDT on Oct. 22. CAD = Canadian dollar. GBP = British pound.

Last week, Matt Derr, a foreign-exchange strategist for Credit Suisse in New York, told Bloomberg: "Our bearish euro-dollar view is predicated on the idea that the ECB will extend quantitative easing by year-end. We expect Draghi to verbally lay the groundwork for an extension of QE -- but for the actual extension to occur at the bank's December meeting."

Credit Suisse was spot on (it seems the bank is earning its place at the top of Bloomberg's ranking of top major currency forecasters for the four quarters ended June 30).

The European Central Bank left its policy interest rates unchanged but set the stage for an expansion of the bank's existing securities purchase program ("quantitative easing") in response to "downside risks to the outlook for [euro area] growth and inflation."

Here's the relevant passage from ECB President Mario Draghi's statement to the press conference (I've emphasized the key bits):

While euro area domestic demand remains resilient, concerns over growth prospects in emerging markets and possible repercussions for the economy from developments in financial and commodity markets continue to signal downside risks to the outlook for growth and inflation. ...

In this context, the degree of monetary policy accommodation will need to be reexamined at our December monetary policy meeting, when the new Eurosystem staff macroeconomic projections will be available.

The Governing Council is willing and able to act by using all the instruments available within its mandate, if warranted, in order to maintain an appropriate degree of monetary accommodation.

In particular, the Governing Council recalls that the asset purchase program provides sufficient flexibility in terms of adjusting its size, composition and duration.

In the meantime, we will continue to fully implement the monthly asset purchases of 60 billion euros. These purchases are intended to run until the end of September 2016, or beyond, if necessary, and, in any case, until we see a sustained adjustment in the path of inflation that is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term.

There's been increasing speculation that the ECB would open the monetary spigot wider, which abated somewhat this week in the wake of ECB governing council member Christian Noyer's comments that the bank's quantitative easing program is "well-calibrated."

The euro is now down to a two-month low against the dollar for a year-to-date decline of 8.2%. Financial markets are taking Mr. Draghi at his word; on the other hand, traders are becoming confused and frustrated by the words of Fed policymakers concerning the timing of the Fed's first post-crisis interest rate hike. At some point, words must be followed by action.

Both the Fed's and the ECB's December monetary policy meetings will now be highly anticipated. This normally quiet month for financial markets could turn out to be a little more interesting than usual.