The euro surged to a 17-day high against the dollar as investors see the European Central Bank to be done with stimulating the euro zone economy after cutting rates
The euro rocketed to a 17-day high against the dollar on Friday as German government bond yields surged on the back of investors thinking the European Central Bank was done stimulating the ailing euro zone economy after cutting rates on Thursday.
The central bank cut its deposit interest rate by 10 basis points to a record low of minus 0.5% and said it would restart bond purchases at a rate of 20 billion euros a month from Nov. 1 for an indefinite time.
The revived bond purchases exceeded many expectations because they are set to run until “shortly before” the ECB raises interest rates. Given that markets do not expect rates to rise for nearly a decade, such a formulation suggests that purchases could go on for years, possibly through most of Christine Lagarde’s term leading the bank.
As he announced the monetary stimulus package, ECB President Mario Draghi also emphasised on the importance of fiscal stimulus and structural reforms, essentially saying that only a combination of both monetary and fiscal stimulus could revive European growth.
The ECB gave the impression to the market that they are pretty much done with monetary policy stimulus, said Vasileios Gkionakis, global head of fx strategy at Lombard Odier, adding that there’s no denial that the ECB delivered on all fronts.
The main message (from the ECB) is that it has been the bottom in the euro/dollar, Gkionakis said.
The euro was up 0.3% at $1.1096 GBP=D3 after jumping earlier to $1.11095, its highest since Aug. 27. The 10-year German Bund yield surged to a six-week high of negative 0.48% DE10YT=RR.
The day before, the common currency briefly went below $1.10. Deutsche Bank had projected the euro would fall below $1.10 and now that it had, the German bank said it was now neutral on the common currency.
George Saravelos, Deutsche’s currency strategist, said in a note that they think the risks on the euro are now turning more two-sided, adding that he was not willing to turn bullish just yet.
He said that they believe EUR/USD will remain stuck around 1.10.
The dollar rose overnight against the Japanese yen – after Donald Trump said he would not rule out an interim trade pact with China – then gave back some of those gains.
Washington and Beijing are preparing for new rounds of talks aimed at curbing their trade war, which has dragged on for more than a year, roiling financial markets and threatening to push other economies into recession.
The greenback was last down 0.1% at 107.99 versus the yen JPY=EBS after surging to a six-weeks high of 108.265.
The Chinese yuan also strengthened in the offshore market to a four-week high of 7.0330 versus the dollar on the back of Sino-U.S. trade optimism CNH=EBS. Dollar/yuan was last down 0.3% at 7.0752.
Takuya Kanda, general manager of research at Gaitame.com Research Institute in Tokyo, said they have managed to scale back their pessimism about U.S.-China trade talks, which is a supportive factor for now.
Elsewhere, receding fears of a no-deal Brexit and dollar weakness pushed the pound to a seven-week high of $1.2435 GBP=D3 on Friday. Investors trimmed their expectations of a no-deal Brexit after Northern Ireland’s largest political party said it may agree on certain European Union rules after Britain exits the EU, even though it later denied those comments.
Against the euro, the gains were more constrained, with euro/sterling last down 0.5% at 89.25 pence EURGBP=D3.