April 23, 2018

Euro jumps as European Central Bank hints at the end of quantitative easing

10 March 2018, 01:12 | Lionel James

Euro jumps as ECB hints at the end of quantitative easing

Euro Turns to ECB for Directional Cues EUR  GBP EUR  USD in Ranges

London's benchmark FTSE 100 index closed 0.6% higher at 7,203.24 points.

The euro strengthened on the news of the European Central Bank dropping its easing bias on asset purchases.

Spain's 10-year bond yield, up 1.5 bps at 1.42 percent ES10YT=RR , was set to end the week down around 12 bps - its biggest weekly fall since July last year.

What was driving the market?

The euro rose from $1.2379 before the bank issued its policy statement to as high as $1.2425.

Stocks in Europe and the United States also moved higher.

The main driver behind the correction in the GBP/EUR exchange rate was Draghi's suggestion that, in light of its downbeat inflation outlook the ECB's approach to monetary policy would remain "reactive".

While Thursday's European Central Bank (ECB) policy decision has the biggest potential to influence the Pound to Euro (GBP/EUR) exchange rate outlook this week, Friday's United Kingdom and Eurozone data could also affect trade if it surprises.

Traders were waiting to see if the rate setters would remove that particular bit, as it could indicate the end of QE is moving closer.

The ECB is due to publish its economic forecasts on Thursday but significant changes to its estimates of future inflation and economic growth are not expected by economists.

Euro Turns to ECB for Directional Cues EUR  GBP EUR  USD in Ranges
European Central Bank holds interest rates steady

For 2020, the inflation forecast was raised to 1.7 percent from 1.5 percent. Meanwhile, the ECB kept its deposit facility rate unchanged at -0.4 percent while removing its easing bias and ECB President Mario Draghi said inflation remained subdued.

European Central Bank added that the Eurosystem will reinvest key payments from maturing securities acquired under the asset purchase program for a longer period of time after the end of its net asset purchases, and in any case for as long as necessary.

European stocks had opened in positive territory as tensions over planned US tariffs on steel and aluminum imports eased after the White House indicated that major trading partners Canada and Mexico could be exempt.

New information confirmed "the strong and broad-based growth momentum in the euro area economy, which is projected to expand in the near term at a somewhat faster pace than previously expected", Draghi said in the introductory statement for the post-decision press conference in Frankfurt.

"Spreads more broadly may have some more breathing room as the actual government formation discussions in Italy do not look set to kick off for real until later this month when parliament convenes for the first time", ING strategists said in a note.

"Today's marginally hawkish concession from the European Central Bank has been overshadowed by a marginally negative revision to their inflation forecasts today, with the DAX hitting the highest level in a week in response", Joshua Mahony, a market analyst at IG, wrote in emailed comments.

"So we are asking the ECJ for a clarification of the present situation", Draghi said.

Which stocks were in focus? "It's the confirmation that normalization is on track", he said.

Soft drinks company Britvic rose 6.3 per cent after Morgan Stanley upgraded it to "overweight", saying the price offered an attractive entry point.

Analysts said the message could be complicated by USA events.

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