European Central Bank replaces N.Korea in euro zone bond market spotlight

Posted September 07, 2017

Later on Thursday's European session and during the American session, the Australian Dollar to Euro exchange rate will react to the day's European Central Bank's (ECB) September policy decision.

Investors are also looking forward to President Mario Draghi's press conference as they seek for more signs on when the bank would start loosening its broad quantitative easing (QE) program.

This environment has profound implications for markets - we now expect little movement in the United States curve until year -end, and only very measured ones in Europe, as the European Central Bank (ECB) strives to implement as dovish a tapering pattern as possible, which leads us to believe that equities should fare better in Europe than in the US.

Figures released earlier on Thursday confirmed that the eurozone's economy grew by 0.6% in the three months to June, following growth of 0.5% in the first quarter of the year. As the European Central Bank may still need some evidence of rising underlying inflation - hopefully from German wages early next year - to accelerate tapering, we maintain our call for a six-month extension of APP, at €40bn/month, until June 2018.

It seems unlikely that the European Central Bank will make a major announcement at this meeting on the next change to the path of the QE programme. 2- Growth forecasts likely will be revised higher, as the recent currency strength arguably already reflects the long streak of positive surprises from the euro area economy. That, we think, won't stop FX investors from worrying about potential commentary pushing back against Euro strength, therefore we think EURUSD will remain range-bound into Thursday' meeting.

As a result, recent underwhelming Eurozone data has just given investors more reason to sell the shared currency.

The euro's advance - it has gained almost 12% against the dollar since the start of the second quarter - are making those predictions increasingly hard to justify.

"The era of cheap money in Europe should come to an end - despite the strong euro", Cryan told a room full of bankers in Frankfurt on Wednesday, a day before the ECB's governors meet to discuss policy.

If Mr Draghi and his colleagues were to bring their asset purchases to a premature end, let alone raise interest rates, it would simply send the euro higher still and make their job even harder. "Also, when a currency is moving fast, a central bank and everyone else will worry that the trajectory will continue".

ECB To Keep Buying Bonds Forever?

Still, ECB comments will be scrutinized for any clues on the timing and scale of a taper.

Sterling also came off its highs when the US dollar recovered and with no economic data on the calendar, the currency's flows were driven entirely by the market's appetite for USA dollars and euros. But now pressure is building from critics of the ECB's ultra-low interest rate policy.

Low risk appetite turned global stock markets into a sea of red while precious metals such as gold and silver were each 1 percent higher.

Draghi will find it hard to avoid the issue of the euro's firming after policy makers expressed concern in July about the risk of an overshooting euro.

The ECB left its benchmark short-term interest rate at zero, and its deposit rate at negative 0.4 percent, both record lows.