Euro Stalls as Draghi Hints at Quantitative Easing

Isabelle Zammit Isabelle Zammit

6 June 2019

Euro stalls

Thursday saw the long-awaited statement from the European Central Bank regarding interest rates. To the market’s surprise, ECB’s policymakers stated they would not be cutting interest rates for the next year. This is despite the possible negative consequences that the continuing trade tensions between the United States and China could have on the European Union’s economy.

The statement saw the euro perk up a little but Mario Draghi, President of the European Central Bank, brought the currency back under control. His statement that there had been some suggestions of resuming quantitative easing stopped the euro in its tracks.

The euro had gained approximately 0.075 after the ECB’s statement pertaining to rate cuts but corrected back to $1.1261 after Draghi made his statement. Furthermore, the market also saw government bonds being sold off amid a more pessimistic outlook.

Some experts, like Jan von Gerich, the Chief Strategist for Nordea, feel that Draghi hasn’t yet accomplished his goal. They feel that the press conference was meant to show the ECB is prepared to take measures if necessary, including increasing asset purchases and cutting rates.

While only small changes were made to inflation and growth forecasts, the ECB council decided to wait until mid-2020 to start considering rate cuts. This makes it almost impossible for the person who will replace Draghi in November 2019 to make any changes to interest rates for a minimum of eight months.

Draghi stated that they are confident in the baseline they must take note of the risks to the region’s economy. At the moment, the main risks are the trade tensions between the United States and China on one side of the globe, and the United States and Mexico on the other.

What the market truly found interesting was how the ECB’s decision was worded. The central bank didn’t it would not be increasing rates, but that they wouldn’t be cutting the rates for the following year. This says more about the ECB’s position than their actual statement.

Mexico Under Fire from the U.S.

Mexico seems to be the next country to fall victim to trade tensions with the United States as President Donald Trump threatened to impose tariffs on goods from Mexico.

Thus, the forex market in Mexico suffered on the back of this statement, which had global effects. This situation has placed even further strain on a global economy that’s already suffering due to the United States’ trade war with China.

It should be noted that Mexican officials feel that they could come to a mutually beneficial agreement with the United States.

U.S. – China Trade Tensions Intensify

The U.S. dollar slipped on Thursday as the market is still pessimistic after President Donald Trump stated he would decide on tariffs for China after attending the G20 summit. Trump also stated that he could raise tariffs by as much as $300 billion more, which did not offer the market any optimism.

The U.S. dollar index declined to 96.968, representing a 0.3% drop.

The market is also keeping an eye on the Federal Reserve to see if there is a rate cut in the works. This is the result of Jerome Powell, Chairman of the Fed, stating that the bank would take the necessary steps to sustain the economy.

 


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