But countries that do a lot of business with the eurozone ” such as Switzerland, Britain, and Sweden ” are breathing a quiet sigh of relief.
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Though the unexpectedly small monetary easing package announced by the European Central Bank is leading some to wonder whether Gov. Mario Draghi has lost his touch, “Super Mario” could simply be laying the groundwork for his next magic trick. Currencies tend to weaken when rates are low.
Also, the interest rate applicable when commercial banks deposit surplus funds with the ECB has now dropped to minus 0.3 percent from minus 0.2 percent. Investors had expected to see the European Central Bank step up its monthly purchases of bonds as well.
The response in the markets was feverish.
If all members of the eurozone fail to act in concert in forging ahead with financial policies, the markets will certainly regard the euro area hereafter as remaining in disarray.
The attention now turns to the FED’s pivotal meeting in two weeks with markets now firmly expecting its policymakers will lift short-term rates for the first time since 2006. Without them, he added, “inflation would likely have been negative this year”.
There was no such pressure after the ECB’s decision and the euro pushed up from 1.08 francs to 1.09 francs.
Bonds found their footing after Thursday’s tumble triggered the biggest rise in short-dated German yields for nearly five years and the United States yield curve steepened the most since July.
Accounting software firm Sage is also a big riser after an upgrade from JPMorgan after well-received annual sales that rose 6% to £1.4 million earlier this week.
Painful as they may be, the euro’s post-ECB rally was in truth, arguably, largely driven by position adjustments, and that does not necessarily reflect the true picture. The result was a 30 percent jump in the value of the franc that cost companies millions. The Swiss watch industry is particularly affected by currency swings since the appeal of their products depends on them being “Made in Switzerland”.
The ECB is constantly monitoring economic and financing conditions, he said, and “if these developments change in directions that make it necessary to respond again, we are of course ready at any time to adjust this array of tools to secure the return of inflation to our objective without undue delay”.
Responding to reporters’ questions over possible future action and whether interest rates were now at their lower bound, Draghi said: “We are not going to be hampered in this by technical issues”.
“I would dispute entirely the notion that we are powerless to reach our objective”, he said. “Could it be that the board will also feel comfortable enough with the finely calibrated move from the European Central Bank yesterday to leave their own policy unchanged?” He has frequently criticized the ECB’s low interest rate policy as penalizing people who save their money.
The ECB has announced a cut on deposit rate and an expansion of its stimulus program.
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The FTSE 100 found support at 6195 and may still trade higher this afternoon given that U.S. NFP prints higher than 200k expected (Bloomberg News survey).
