With the ECB not expanding stimulus as much as expected, European bond prices fell sharply, sending yields higher.
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The kiwi dropped to 60.87 euro cents at 8am in Wellington, from 62.72 cents at 5pm yesterday. “The ECB decision did prompt covering of euro shorts, but the market was thin going into the year-end, which exaggerated movements”, said Bart Wakabayashi, head of forex at State Street in Tokyo.
But when the markets think that even more forceful actions are required to break the euro zone out of its stupor-bigger rate cuts, bolder bond purchases-you get a sharp and unexpected move in the opposite direction, like the one today.
“Inflationary pressures remain weak”, said Ben May at Oxford Economics.
The ISM said its non-manufacturing index dropped to 55.9 in November from 59.1 in October.
Heating oil rose 5.4 cents to 1.359 dollars a gallon, wholesale gasoline rose 0.3 cent to 1.296 dollars a gallon and natural gas rose 1.6 cents to 2.181 dollars per thousand cubic feet. With new projections from ECB staff indicating the economy is growing, albeit gradually, Draghi may have been persuaded to wait to see if the region’s low inflation rate – the bank’s chief concern – doesn’t turn up decisively next year.
Low inflation can help consumers by making their euros go farther. Now it will carry on until the end of March 2017.
– said it would re-invest principal payments on the bonds it has bought.
“We made a decision to extend the asset purchase programme”.
The bond purchases are a way of increasing the amount of money in the economy, which in theory can make credit cheaper and raise inflation.
After inflation in the eurozone proved lower than expected in November at 0.1 percent, the European Central Bank now sees prices rising only 0.5 percent this year, 1 percent in 2016 and 1.6 percent in 2017. The bank’s target is just under 2 percent.
Asked by a journalist at the press conference if the bank should not have done more, given market expectations, Draghi said: “We know that what we have done was not enough, we have to do more, so we do more”.
Yellen told lawmakers the US central bank was close to lifting its overnight interest rate from near zero.
In early Friday trade, it last stood at $1,064.30, up slightly on the day and is on course to post its first weekly gains in seven weeks. Germany’s DAX was down 0.2 percent while the CAC-40 in France was flat.
The yield on 10-year German Bunds jumped about 20 basis points to 0.666 percent from 0.474 percent on Wednesday, the biggest jump since late April.
We’ve said it before, and we’ll say it again: nobody moves markets like Mario Draghi.
More stimulus also helps keep the euro’s exchange rate down, a boost to exporters and the economy of the 19 countries that use the euro. The Financial Times on Thursday caused a flurry on currency markets after erroneously tweeting that the European Central Bank was to leave interest rates unchanged, minutes before the ECB cut a key rate.
However, Craig Erlam, senior market analyst at OANDA, argues the opposite is the case.
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This marks an important stage in the ECB’s journey into negative interest-rate territory, not least since Mario Draghi, the bank’s president, had said in September 2014 that the ECB had reached the “lower bound” (set by the fact that depositors can in principle avoid being charged a negative rate by switching their holdings into cash).
