Currency markets reacted heavily to comments by ECB President Mario Draghi on Thursday that the European Central Bank (ECB) may proceed with further Quantitative Easing (QE) measures if necessary. The EUR/USD took a sharp nosedive while the European stock markets remained supported.

The European stock markets reacted positively at the ECB President’s hints of a possible QE programme increase. On Thursday the FTSE 100 increased by 0.7%, while the German DAX 30 and the French CAC 40 jumped by 3% and 2.8% respectively. The EUR/USD fell dramatically as on the same day it posted losses by 2.3% and found support at the 1.10-level. On a weekly basis, the world’s most popular currency pair lost an overall 3.1% and ended trading at 1.10169.

The ECB initiated its monetary stimulus measures by purchasing €60 million worth of bonds on a monthly level, and will consider increasing its current €1.1 trillion QE stimulus programme during its next meeting in December as part of its continuing efforts to rejuvenate the Eurozone’s inflation level upwards. While this is only a possibility, markets revealed their worries that the ECB might proceed with intensifying their monetary policy measures during its next meeting by reacting immediately with dramatic sell-offs of the euro given that the latest Consumer Price Index (CPI) data for September showed a 0.1% decrease. The bank left interest rates unchanged at 0.05%.

Even though his comments for a possible escalation of the QE programme, Mr Draghi sounded satisfied with the current state of the Eurozone’s economy as he stated that the asset purchase program is running smoothly and is already having a positive result. However, a large part of the investment community predicted that the ECB would stick with the current level of interest rates set more than a year ago. The current overnight deposits rate is -0.2% which implies that banking institutions must spend money to keep funds in their member state’s central bank, and the marginal lending facility is at 0.3%.

The ECB President also said that the governing council had in-depth discussions on different aspects of the monetary policy, including an additional trim of the already low rate imposed to banks to deposit their funds at the central bank. And although he has not mentioned any decisions being made, the comments were taken by many as a hint that the ECB is getting ready to intensify its QE programme in December given that inflation levels are way below the 2% set as a target.

International economic developments continue to pose downside risks for Eurozone’s economy. On Friday, the People’s Bank of China (PBoC) trimmed its one-year interest rate from 4.60% to 4.35% as part of its latest efforts to stay on target for a 7% growth for 2015. But even if the global economic situation improves, the likelihood of expanding the QE programme is still high because the ECB expects that Eurozone inflation levels could remain very low in the near term.

Volatility levels are on a high as there is widespread uncertainty on whether the EUR/USD’s latest dramatic slip will be followed by a change to an uptrend. The upcoming Federal Open Market Committee (FOMC) interest rate decision is expected on Wednesday 28 October at 18:00 GMT. Even though the markets are expecting a possible interest rate increase to take place at or after the December’s meeting, any change of the Fed’s rhetoric towards a hike could be enough to send the markets on fire.