ECB announces QE end date, warns interest rate hikes long way off

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15 June 2018

thomasdodds

The Euro fell sharply against every currency on Thursday, falling by close to two percent, its lowest level against the US Dollar since late May, after the European Central Bank delivered some very explicit forward guidance on monetary policy.

A
s speculated going into the meeting, the bank announced plans to begin winding down its quantitative easing programme beyond its existing end date. Asset purchases will be extended beyond September, at a reduced pace of 15 billion Euros a month and, after this short tapering period, will be wound down to zero in December. The common currency, however, fell sharply after the ECB indicated that any interest rate increases in the Euro-area remain a very long way off. The ECB explicitly stated in its statement that ‘significant stimulus was still needed’ and that it expects the key interest rates to remains at present levels ‘at least through the summer of 2019’.

Mario Draghi’s press conference was equally dovish. He also issued fairly sharp downward revisions for the bank’s growth forecast for this year, to 2.1%. We think that this meeting highlights the excessive emphasis that the market has been placing on last year’s growth surprise in the Eurozone. We previously pointed out that the key driver of ECB monetary policy is core inflation, given the ECB’s singular mandate. With core inflation still well below target, it is clear that the ECB is in no rush at all to even consider raising rates. We believe that any hikes are now very unlikely until deep into the second half of 2019. This lack of higher rates should, in our view, keep the Euro at or modestly below its currently suppressed levels against the US Dollar throughout much of 2018.

Sterling on a rollercoaster, US retail sales hit best month in six

The US Dollar received extra support following yesterday afternoon’s US retail sales, which posted their largest increase in six months. Sales jumped by, a much stronger than anticipated, 0.8% last month, reinforcing the hawkish comments made from the Federal Reserve on Wednesday evening stating that the US economy was approaching ‘normal levels’. With consensus very low for this afternoon’s industrial production numbers, another upward surprise here could be on the cards.

Dragged lower by a broadly stronger US Dollar, the Pound ended up having a very mixed day yesterday. Sterling slipped by almost one percent against the greenback, although it rallied by a similar amount versus the Euro. The bulk of these wild swings can be attributed to post-ECB trading, although it was interesting to see how quickly investors overlooked Thursday morning’s very positive retail sales figures. it appears that currency traders currently have little confidence that the Bank of England will act on this upturn in data, until they get more concrete evidence that the slowdown in the UK economy in the first quarter of the year was indeed temporary.

With no major economic news in the UK over the next few trading sessions, all eyes early next week will turn to Thursday’s Bank of England meeting.