The ECB on Thursday cut its deposit rate to a record low -0.5% from -0.4% and said it will restart bond purchases of 20 billion euros a month from November. The purchases will run for as long as necessary and end shortly before it starts raising the key ECB interest rates.
It also said that euro zone banks will be exempted from paying a penalty charge on idle cash worth six times their mandatory reserves.
“Cutting the deposit rate and introducing 'tiering' at the same time was likely to have a mixed impact on the EUR and that seems to be one of the reasons why the weakness in EURUSD on Thursday reversed abruptly,” Stephen Gallo, European head of FX strategy at BMO Capital Markets said in a report on Friday.
The single currency initially dropped on the new stimulus, testing more than two-year lows, before dramatically changing direction.
By exempting banks from the penalty charge, the ECB aims to minimize stress in financial institutions that have been harmed by years of low rates.
“Tiering aims to protect the credit transmission channel, but reduces the FX impact of lower interest rates,” Morgan Stanley analysts said in a report.
The euro gained 0.12% to $1.1074. The single currency fell as low as $1.0925 immediately after the ECB decision on Thursday.
Short covering as the euro failed to break below that level, and hopes of de-escalation in the U.S.-China trade war also helped turn the euro around after the ECB decision.
U.S. President Donald Trump said on Thursday he preferred a comprehensive trade deal with China but did not rule out the possibility of an interim pact, even as he said an "easy" agreement would not be possible.
Data on Friday showed that U.S. retail sales increased more than expected in August, pointing to solid consumer spending that should continue to support a moderate pace of economic growth.
That comes after better-than-expected producer price inflation data on Wednesday and consumer price data on Thursday.
The improving indicators are unlikely to sway the Federal Reserve from cutting interest rates when it meets next week.
(Reporting by Karen Brettell; Editing by Andrea Ricci and Marguerita Choy)
By Karen Brettell