The euro climbed past $1.2050 despite a verbal warning on its strength from ECB head Mario Draghi yesterday, as the central bank flagged it was preparing to scale back its €2.3 trillion stimulus programme.
Traders were left waiting after the ECB’s initial statement reaffirmed its ultra-easy policy stance, but leapt on the euro as Mr Draghi said the bank’s staff were looking at how to wind down its 60 billion-euro-a-month buying programme..
The euro jetted as high as $1.2059 from just under $1.1975 before Mr Draghi spoke, while European stocks saw their day’s gains halved at the prospect of ongoing euro strength.
“We will be ready for much of what we have to decide (to scale back stimulus) by October,” Mr Draghi said at the ECB’s post-meeting news conference.
“Right now, judging the way the world is going we should be ready.”
Markets also benefited from relief that the US Congress struck a deal on the country’s debt limit and that there had been no further ratcheting up of the North Korea crisis in Asia, though Wall Street saw a flat start with Hurricane Irma on track to hit Florida by the weekend.
Canada’s dollar held its gains, after a surprise interest rate rise on Wednesday reminded everyone that G7 monetary settings will not remain super-easy forever.
It also showed the clear implication of policy tightening right now – the Canadian dollar surged more than two per cent at one point to its highest levels in two years.
Mr Draghi acknowledged that that was one of the ECB’s main conundrums. All the economic activity signals suggest it should take its foot off the gas – updated Eurostat figures as policymakers met confirmed the bloc saw robust growth in thesecond quarter.
But the 13 per cent surge of the euro already this year is impacting its sub-target inflation outlook, forecasts for which were trimmed by the ECB yesterday.
It is not the only issue Frankfurt is struggling with either.
Sweden’s crown – the only northern European currency to have risen against the euro this year – fell yesterday after its central bank said it was introducing a bigger buffer on its inflation target.
That should give it more leeway on policy moves.
Wall Street’s S&P 500, Dow Jones and Nasdaq indexes slipped 0.2-0.3 per cent as Euro zone yields fell despite the ECB’s hint at reduced bond buying.
In commodities, oil prices maintained most of this week’s strong gains as the reopening of US Gulf Coast refineries improved the outlook after sharp falls caused by Hurricane Harvey.
US crude futures were steady at $49.05 per barrel, having gained 3.0 per cent in the previous three sessions, while Brent ticked to a new 3-1/2-month high of $54.59.