Euro, bond yields climb as Draghi flags tightening talks in autumn

Geneva Matthews
July 21, 2017

The ECB left interest rates on hold at the latest monetary policy meeting and also made no changes to forward guidance, contrary to some expectations that there would be a removal of rhetoric indicating that bond purchases could be increased further.

After ECB chief Mario Draghi raised the prospect of policy tightening last month, he signaled that any policy tweaks would come only gradually, setting the scene for a possible discussion in September about a long-awaited tapering of its asset buys.

Draghi emphasised the weakness of inflation across the Eurozone.

The yen meanwhile had weakened to 112.325 per USA dollar after the BOJ pushed back its projected timing for hitting its 2% inflation target until 2020.

U.S. markets were little changed in midday trading after all three major United States indices hit fresh record highs on Wednesday, which boosted Asia markets. Inflation remains at 1.3 percent, well below the bank's goal of just under 2 percent it considers best for the economy. Increasing the supply of money in the economy can in theory raise inflation.

Draghi's June 27 comments in Sintra, Portugal, hinting at the possibility of changes to the central bank's aggressive stimulus sparked a "taper tantrum" that sent the euro and bond yields sharply higher.

Not lost on FX traders, when queried by a journalist regarding recent strength in the euro, Draghi said financing conditions in the currency bloc were still "favourable". Asset purchases at the current monthly pace of 60 billion euros (69.39 billion USA dollars) will continue until the end of December 2017, or beyond if necessary. Market analysts expect the purchases to decrease and then end next year, and for Draghi to send a clear signal about that at the September 7 meeting.

Federal Reserve, is expected in the near future to begin narrowing its quantitative easing program, in which it buys government and corporate bonds in attempts to drive down market interest rates.

The euro is up nearly 10% so far this year but and was a shade lower at US$1.1511 ahead of Draghi's news conference, having hit a 14-month high of US$1.1583 on Tuesday.

Draghi is not expected to give much away at his news conference following the meeting of the bank's 25-member governing council, at which no changes in the stimulus are expected.

Earlier, the European Central Bank announced it will continue to make purchases under the asset purchase programme (APP) at the current monthly purchase pace of €60bn (£53.5bn, $69.3bn), adding it will also keep interest rates unchanged at zero in line with market expectation.

Some market participants said there was a chance the euro could be hit if the European Central Bank does not at least tweak its position on Thursday - possibly by dropping a reference to its readiness to increase the size or duration of its asset-purchase programme.

Simply put, investors still largely expect the European Central Bank to begin tapering those purchases in 2018, eventually winding them down. Long-term interest rates should rise.

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