Monetary policy announcement shocks and high-frequency exchange rate dynamics: evidence from the euro area

Abstract

This thesis investigates the immediate impact of the European Central Bank’s monetary policy announcement shocks on the exchange rates. I specifically focus on the impact of tightening and easing announcement shocks on the high-frequency exchange rates in the euro area for the period 1999-2023. I identify shocks by the reaction of one- and threemonth Overnight Index Swap rates to policy announcements. I conduct the event study by performing regression analysis on three exchange rate pairs: EURUSD, EURGBP, and EURJPY.

I find a statistically significant relationship between the European Central Bank’s monetary policy announcement shocks and the exchange rate movements during the press release window. My finding indicates that, on average, a 100-basis point monetary policy announcement shock results in an immediate 3-4% appreciation of the exchange rate. Additionally, I observe that the currency pairs react to shocks with varying magnitudes. While monetary policy shocks do have a significant impact on exchange rate movements, there are also other factors that my model does not capture.