How strong euro may allow the ECB?
The European Central Bank is not so easy to part with old habits. The ECB argues that it is not the euro are targeted, but the leadership of the central bank has a habit of spending verbal intervention in the event of excessive growth of the euro.
Usually representatives of the ECB begin to comment on the euro when the euro / US dollar is around 1.15.
It happened this Thursday. EUR / USD Pair in morning trading in Europe rose to 1.1456, followed by two representatives of the ECB’s management made comments, which highlighted the willingness of the central bank to provide new stimulus package if necessary.
Those comments contributed to the downfall of EUR / USD below 1.14.
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ECB representatives before the show on Thursday the euro against the US dollar reached approximately 5% in the current year. This complicates attempts to accelerate the central bank stable low inflation.
“The effects of a strong currency are the same – they create problems in the economy, who are faced with the problem of inflation”, – said Matthew Kobona of Columbia Threadneedle Investments.
“Probably, the ECB still wants to solve the problem by indirect effects: Expressing possibility of additional stimulus,” – said Kobona.
The ECB has a special form of verbal pressure on the euro.
When the euro / US dollar in October last year was close to 1.15, the representatives of the European Central Bank Iv Mersh said that the strong euro increases the “newly emerging downside risks” for economic growth and inflation. According to Mersch, the central bank in the event of the need to accelerate inflation “will act immediately.”
Shortly thereafter, the euro began to fall. By the end of November, the euro / dollar was trading below 1.06.
Intraday EUR / USD Aug. 24 traded above 1.15 on fears that China would devalue the national currency. The next day, the ECB Vice-President Vitor Constancio said that the central bank is “prepared to use all available instruments in the framework of its mandate” in the event of a significant change in the inflation outlook.
ECB President Mario Draghi earlier also spoke about the deflationary pressures caused by the strong euro. Eurozone consumer prices have decreased by 0.1% after a 0.2% drop in March in February, while medium-inflation target ECB is below 2%.
The recent rise in the euro has occurred against the backdrop of strengthening of US dollar, as investors concluded that the Fed is in no hurry to raise interest rates.
However, representatives of the ECB comments on Thursday followed also after investors began to argue that the world’s central banks, including the ECB, are beginning to move away from measures to aggressively reduce their rates.
Is create the impression that announced in March, the ECB’s stimulus package of measures was longer aims to accelerate the pace of lending than targeting the euro.
Many economists argue that the decline in interest rates is the most effective way to weaken the euro, the ECB did last month. Draghi comments even suggested that he did not consider the high probability of further reduction in interest rates. In this case published on Thursday minutes of the last meeting of the ECB has shown that members of the Governing Board at its meeting in March, did not rule out further rate cuts.
“The euro continues to be an important factor,” – said strategist Tusk Maharaj from J.P. Morgan Asset Management. – Nevertheless, the ECB this year is smaller than in the past, focused only on the euro. “
Even taking this into account, many investors believe that the ECB will take further strengthen the euro.
“In my opinion, probably the ECB will have to cut rates again if the euro / dollar will rise above 1.17,” – said Andrew Millvord of Morgan Stanley.
Dow Jones Newswires, PRIME
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