The euro fell sharply on Thursday after the latest policy of the European Central Bank did not meet market expectations for the pace of withdrawal of incentives.
The ECB chose to leave interest rates unchanged, as expected after its last policy meeting, but President Christine Lagarde noted that “the risks of declining growth prospects have increased significantly as a result of the war in Ukraine.” Inflation will remain high in the coming months, mainly due to rising energy costs, she added.
The euro fell 1.2 percent against the dollar after Lagarde’s comment, to a two-year low of just under $ 1.08. He later recouped some of the losses to trade 0.5% lower for the day.
Carsten Brzeski, head of macros at ING Research, attributes the currency’s decline to investors “outpacing themselves” in recent weeks, expecting eight interest rate hikes by the end of 2023.
“Today, however, Lagarde’s comments confirmed the rather gradual process of normalization,” he said.
The central bank said economic data released since its last meeting “boosts its expectations” that its asset purchase program (APP) should end in the third quarter of the year.
However, Frederic Ducrose, a strategist at Pictet Wealth Management, said the currency’s decline was due to Lagarde’s lack of a “strong hint or firm commitment” that the APP would end in June. “This is a reaction to the positioning of the markets before the conference,” he said.
Inflation in the euro area has risen in the last year, with price growth reaching 7.5% last month. Both the US Federal Reserve and the Bank of England have already begun raising interest rates in a bid to reduce the sharp rise in prices, but the ECB has said it must first stop buying bonds before raising borrowing costs.
ECB politicians also need to balance the impact of the war in Ukraine, which is expected to have a huge impact on the European economy.
“The supply shock resulting from the war suggests a difficult compromise for the board, given weaker growth and higher inflation,” Goldman Sachs analysts said. The investment bank expects the ECB to raise interest rates in September, but said an increase in July would not be ruled out if inflationary pressures intensified.
Eurozone government bonds weakened after the ECB’s decision. The yield on the 10-year-old German Bund rose 0.08 percentage points to 0.84 percent, while the Italian equivalent also added 0.11 percentage points to 2.48 percent. Yields rise when prices fall.
The regional index Stoxx Europe 600 rose by 0.7%, the German Dax rose by 0.6% and the French Cac – by 0.7%. The FTSE 100 in London added 0.5%.
In the United States, the recent rise in government bonds reversed, with yields on the government’s 10-year reference debt rising 0.13 percentage points to 2.83 percent.
Unexpectedly weak data on core inflation earlier this week prompted investors to ease expectations of how aggressively the Federal Reserve will raise interest rates, leading to rising bond prices. However, in an interview Thursday, John Williams, president of the Federal Reserve’s New York branch, stressed the need to move interest rates “back to more neutral levels.”
Wall Street’s S&P 500 benchmark fell 1.2 percent after adding 1.1 percent in the previous session. The technology Nasdaq Composite lost 2.1%.
Oil prices rose on Thursday as Brent international crude rose 2.7 percent to $ 111.70 a barrel.
In Asia, Hong Kong’s Hang Seng index added 0.7% and China’s CSI 300 rose 1.3%. Japan’s Topix rose 1 percent and South Korea’s Kospi traded unchanged.
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