Euro surges a little as ECB hedges bets

Denise Jackson

european central bankThe single European currency managed to gain a little ground on Thursday after the European Central Bank announced that it would not be cutting interest rates.

The announcement came from Mario Draghi, the President of the ECB – and he also announced that the base benchmark deposit rate would also remain firm, this time at -0.4%.

Investors were primarily focused on what the central bank’s decision would mean for the future. In remarks made after the announcement, the Bank said that it aimed to keep rates at “at their present or lower levels”.

This statement gave the Bank substantial room to manoeuvre in the future and could well indicate that either rate cuts are on the cards for subsequent meetings or simply that quantitative easing could soon be on the way.

Draghi said he believed that there was not much chance of a recession or economic contraction hitting the Eurozone, a move which is likely to offer some reassurance to traders who would otherwise interpret the statement as entirely dovish.

He did warn, however, that low inflation could persist, and that an economic surge in the second half of the year was a little less probable.

As a result of these developments, the euro went up by 0.3% over the course of the day in its pair with the US dollar. It sat at $1.1170 at one stage.

However, in a sign of just how jittery the markets are at any indication of potential dovishness, the currency earlier dropped to its lowest point in a couple of months and reached $1.1102.

This was in part due to the ECB’s comments, and also in part due to fresh gloomy economic data from Germany – this time related to business sentiment.

In other currency pairs, the pound continued to suffer. It was unable to break out of ranges close to its more than two-year low point against the US dollar. It was recorded at $1.2474 in the GBP/USD pair. This came in part as a result of focus on pro-Brexit Boris Johnson’s Brexit policy, which was in the news as he put together his government.

The US dollar had a mixed day. The dollar index, which is calculated by comparing the greenback’s performance to several other currencies and in particular to the resurgent euro, was down by 0.2% and reached 97.574 at one stage.

Perhaps a truer indicator of market demand for the dollar came when the euro was removed from the equation. It surged against the Japanese yen, for example, and went up by 0.3% to 108.47.

It benefitted from an almost 2% jump in the amount of US-manufactured capital goods items over the course of June.

The US dollar’s next major event to contend with will be the Federal Reserve’s announcement of its interest rate decision, which is scheduled to happen on Wednesday of the upcoming week.

Markets are now coalescing around an assumption that a rate cut of 0.25% is on the cards, although it is still not certain, and the Fed may well choose to make a 50 basis point, or 0.5%, cut instead.

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Denise Jackson
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