Coming into this week, currency markets widely reflected the view that the European Central Bank (ECB) would lower its deposit rate to -0.4%, further weakening the euro in the process. Hedge funds were among the speculators piling into bearish euro positions ahead of Thursday’s ECB announcement.

However, the ECB roiled global markets, opting to lower its deposit rate to -0.3%, news that sent the euro surging against the dollar. Although it closed lower Friday, the CurrencyShares Euro Currency Trust (NYSEArca: FXE) still finished the week with a gain of more than 2%, meaning some hedge funds were crimped along the way.

Prior to the Thursday announcement, currency traders were large bearish on the euro currency. For instance, one trader on Wednesday bought 52,000 $28 call options, or roughly a $5 million bet, in the ProShares UltraShort Euro (NYSEArca: EUO), which provides -2x or 200% of the inverse return of the U.S. dollar price of the euro on a daily basis, reports Chris Dieterich for Barron’s.

The euro currency strengthened Thursday after the lighter-than-expected ECB stimulus package disappointed market expectations. The central bank extended quantitative easing by six months until March 2017 at the current rate of 60 billion euros per month and reduced its deposit rate by 10 basis points to minus 0.3%, Bloomberg reports.

“In a sign that large speculators in the world’s biggest currency pair were caught off guard by the ECB, bets on further deprecation outweighed those on a gain by a net 182,845 contracts in the week through Dec. 1, according to Commodity Futures Trading Commission data. The single currency surged 3.1 percent on Dec. 3, the biggest rally since 2009,” Bloomberg reports.

Despite the lighter-than-expected ECB stimulus package, the sell-off may have been overdone. Investors may have pushed up the Eurozone markets Friday after realizing that fundamental factors, like continued central bank easing, are still supporting the economy.

The dollar appreciated Friday as the strong November employment report fueled expectations that the Federal Reserve will hike interest rates later this month. Nonfarm payrolls increased a seasonally adjusted 211,000 last month, with the unemployment rate at 5%, after a rising a revised 298,000 in October, reports James Ramage for the Wall Street Journal.

CurrencyShares Euro Currency Trust

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.