The pressure has increased over recent months, with signs of increased euro zone inflation and marginal improvements in growth.
Advertisement
The Reserve Bank of Australia left interest rates unchanged this past week but their mildly hawkish tone was not enough for AUD to hold onto its gains.
However, the following press conference with ECB President Mario Draghi proved surprisingly optimistic for investors expecting the Italian to offer a typically dovish assessment of recent inflation data.
Still, Draghi agreed that the bank’s governors were more upbeat about the outlook, and noted the “urgency” around risks of deflation had dissipated. “This should pave the way for interest rates to rise in early 2019”.
Draghi said that while geopolitical events have not derailed the economy’s recovery so far, it was unwise to become complacent.
“We think the first step will be a change in the ECB’s forward guidance at the June Governing Council meeting”.
The euro rose as much as 0.7 percent to $1.0615 and German 10-year bund yields gained five basis points to 0.42 percent, the highest in a month.
Those pressures have increased following the latest data, which showed that the United States trade deficit in January jumped to its highest level in five years.
The common currency spiked up to 121.65 against the Japanese yen, its strongest since February 3.
The euro was trading in a positive territory against the aussie with the pair trading at 1.4088.
“Spring is coming and the ECB is celebrating”, judged analyst Florian Hense of Berenberg bank, while noting that, despite the lifting spirits, “it has not moved significantly closer to actually tightening policy”.
The US dollar index, a measure of the greenback against a basket of currencies, dipped 0.2 per cent ahead of US non-farm payrolls data which are expected to show the world’s biggest economy added 200,000 jobs last month.
– European Central Bank declines to offer a new TLTRO, a sign they feel extraordinary monetary policy support is as necessary as it once was. “The exchange rate of the euro is determined by market forces. if we…”
“If we go back to when the euro was created there have always been people who said “oh, it’s wrong, it’s a mistake, can not be done”. Similarly for the exchange rate.
Higher borrowing costs mean a dearer euro and higher investment appeal of the Eurozone economy, which is now jeopardised by several risk factors, including Brexit, the prospects of either France or Italy or both leaving the euro this year, and growth discrepancies between the industrialised and export-driven North and the indebted South.
The ECB’s economic outlook was also a brighter. The OBR had increased its Gross Domestic Product (GDP) projection for the nation from 1.4% to 2% following UK Chancellor Philip Hammond’s Budget. But a “disconnect between financial markets and fundamentals, potential market volatility and policy uncertainties” could “derail the recovery”.
The non-farm payrolls report is always one of the most, if not the most, influential pieces of USA data when it comes to Fed rate hike bets. A change in guidance could be the first signal that the European Central Bank may be setting its sights on an exit from the negative interest rate policy.
Advertisement
Lending is now picking up, albeit slowly, and the damage associated with negative rates has become apparent to the ECB itself, which is also the euro zone’s top bank supervisor.
