Stronger Euro, but not because of the European Central Bank decision

Andrew Cummings
June 8, 2019

The European Central Bank President predicted higher economic growth and inflation for the eurozone this year but lowered both forecasts for next year, reflecting risks linked to trade tensions, said bank chief Mario Draghi.

The bank said it will keep its rate on loans to financial institutions at zero and the rate on deposits from commercial banks at minus 0.4 percent.

The ECB also said it would continue paying banks to lend through its new targeted longer-term refinancing operation, or TLTRO.

The dollar index against a basket of six major currencies stooped to a two-month low of 96.749 midweek as benchmark USA yields declined sharply this week to 21-month lows on investor risk aversion and heightened prospects of the Federal Reserve cutting interest rates.

Earlier this year the European Central Bank had signalled it was likely to raise interest rates by the end of 2019.

The pan-European STOXX 600 index rose 0.6% by 0816 GMT, with bank-heavy indexes in Milan and Madrid both up almost 1% on the prospect the ECB will drive more cash into the economy through the financial sector.

"Another day, another downbeat assessment of the global economy that has been provided from a leading central bank", Marianna Sofocleous at FXTM said of the ECB update.

"Core" inflation, which excludes volatile items like food and energy, is still weaker.

Policymakers must strike a balance, avoiding making banks - especially those in Italy - dependent on the cheap cash, while making the injection significant enough to increase lending, in turn boosting growth and inflation.

Less likely for now - because it's fraught with political risk - would be a relaunch of "quantitative easing" (QE) net purchases of government and corporate bonds, which between March 2015 and December 2018 amounted to 2.6 trillion euros.

On top of overseas threats, worries closer to home include a budget confrontation between Brussels and Rome, elections in Greece and a possible no-deal Brexit, following the looming departure of British Prime Minister Theresa May.

With hoped-for solutions to some of the knotty issues failing to materialize in recent weeks and months, "uncertainty about global trade growth has extended beyond what we believed in March", Draghi said.

The ECB may well have to loosen monetary policy again.

Prices are now seen rising 1.3 per cent this year, 1.4 per cent next year and 1.6 per cent in 2021.

At its regular monthly policy meeting, the European Central Bank predicted higher growth and inflation for the eurozone this year, but lowered both forecasts for 2020.

"The biggest risk for the European Central Bank are the only weakly anchored inflation expectations", DIW's Fratzscher said.

MXN: The Mexican Peso is on the backfoot across the EM complex after hopes of a trade agreement between the United States and Mexico faded, while a sovereign rating downgraded by Fitch added to further losses in the currency. The loonie, which is on track to finish the week more than 1% firmer against the greenback, could extend its advances beyond today's 1½-month high of C$1.3341 to the dollar if there's another month of solid jobs gains.

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