FxWirePro: Market more focused on European Central Bank than Fed

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"Governments need the discipline of the free-functioning market as an incentive to focus on sound sustainable policies that promote growth in their economies and businesses".

This comes after the European Central Bank announced in October a year ago plans to halve its programme to €30bn a month of bond purchases with the scheme ending in September 2018 "or longer, if necessary".

Chinese investors ignored the eurozone relief as the Shanghai composite index dropped 0.8 per cent to test key technical support at the 3000 level following weak retail sales, fixed-asset investment, industrial production and new lending data this week. "However, income and repayments of the existing investments will be reinvested until further notice and we estimate this amount to be around Euro 26bn per month". The central banks are withdrawing stimulus efforts that started during the Great Recession as their economies recover.

The ECB launched its QE programme in early 2015, expanding its balance sheet to over Euro 2.6 trillion. Since before 2012, the Bank has been gradually lowering the interest rate.

The dollar last traded at 109.965 yen, down 0.3 percent, having lost steam after hitting a three-week peak of 110.85 shortly after the Fed's latest policy statement.

The ECB said the monthly pace of its net asset purchases would be halved to €15 billion (S$23 billion) from September until the end of December, at which point purchases would end.

Asian shares wobbled on Friday as investors braced for USA tariffs against China, while the euro flirted with two-week lows after a cautious European Central Bank indicated it would not raise interest rates for some time. The goal: avoid a sharp rise in market rates like one that occurred in 2013 when then-Fed chief Ben Bernanke mentioned withdrawing stimulus.

Markets Insider
Markets Insider

On Thursday, the data for the US economy were almost uniformly encouraging. But it could also increase returns for savers and make it easier for pension savings to grow.

"The euro showed such a big reaction to the European Central Bank meeting as its stance came in sharp contrast to the Federal Reserve, which had struck a hawkish tone just the day before", said Junichi Ishikawa, senior forex strategist at IG Securities in Tokyo.

ECB president Mario Draghi declined to give more detail about the timing of rate moves in a news conference after the policy meeting held in the Latvian capital Riga, not the bank's Frankfurt headquarters.

"The ECB retains a significant degree of flexibility with regards to the reinvestment of maturing QE bonds, which should help quieten any potential bond market tantrums, particularly when seen alongside that assurance that deposit rates will be kept below zero until early 2020 in all likelihood". 10-year Treasurys yield 2.95 percent. It was also not deterred by questions about the new, populist government in Italy.

Italy's Finance Minister Giovanni Tria made assurances at the weekend that the country would stay committed to the euro, while the euroskeptic minister for European Affairs Paolo Savona - whose planned appointment to Tria's position roiled markets - said the common currency was indispensable.

The most important of these is a ban on the ECB buying too many of any one country's bonds, created to avoid accusations of "monetary financing" - or the central bank footing the bill for government spending.

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