European Central Bank monetary stimulus still needed to push up inflation -Draghi

28 January, 2018, 00:36 | Author: Franklin Nunez
  • EUR  USD price chart

This has prompted investors to bet that the European Central Bank will strike a more cautious tone when it meets later on Thursday on potential rate rises and withdrawal of its bond-buying scheme.

Such comments matter because a weaker dollar can help USA exporters by making their goods cheaper against foreign competition.

Barclays bank have forecast the GBP/EUR rate to be nearer 1.17 by the end of the year and the high 1.20s against the US Dollar. The higher euro can become a headache for Europe as it can hurt its exporters and weigh on inflation, which is already worryingly low.

"Overall, the comments regarding the exchange rate were benign", said Eric Viloria, currency strategist at Wells Fargo Securities in NY.

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Draghi also said that recent swings in the euro exchange rate with the dollar — mostly up in the past few days — were "a potential source of instability" that required "monitoring".

The euro zone Stoxx index fell 0.4 per cent after hitting a one-week low, after the single currency spiked higher following remarks from Mr Draghi who said the European Central Bank did not target foreign exchange rates. The central bank promises to keep interest rates stable until it stops buying assets. "Put simply, Draghi is warning that foreign countries could follow the U.S.in a race to the bottom if the USA tries to devalue the dollar".

"The most interesting thing for this meeting will be exactly how they are going to try and clarify some of their comments that came out after the December minutes that were interpreted as hawkish", said Alessio de Longis, portfolio manager for OppenheimerFunds' global multi-asset group.

As widely expected, the ECB kept interest rates and guidance unchanged at its policy meeting, with investors focusing on comments from ECB President Mario Draghi in a subsequent press conference.

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But that progress was stopped later in the day as Trump sought to play down the speech by the U.S. treasury secretary by saying that the dollar was bound to get stronger due to the strong economic data.

There is growing expectation that the program for quantitative easing will end after September.

By virtually all metrics, the eurozone economy is in rude health. Germany's Ifo index of business sentiment matched its record high in January, and surveys show business activity is expanding rapidly. The negative rate is a penalty aimed at pushing banks to lend the money rather than let it pile up risk-free at the ECB.

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