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Euro Exchange Rates Boosted as Draghi Sheds Further Light on Bond-Purchase Programme

Posted on October 14, 2014 by admin in Forex Trading Tips

Rolled up eighty euroThe euro exchange rate complex saw relief buying in the wake of the most recent policy meeting at the European Central Bank.

The euro was up against the key majors, including the pound sterling and US dollar after ECB President Mario Draghi provided some details of the asset-backed and covered bond purchase programme.

As much as 1 trillion euro’s in assets could be purchased and assets in nations rated below BBB- will be purchased with caveats.

This will effectively mean a further 1 trillion euro’s will be pumped into the Eurozone economy; exchange rates will continue to fall as demand for euros is outstripped by supply.

Darren Ruane, Head of Fixed Interest at Investec Wealth & Investment gives his views on how the programme will play out:

“The ECB said it would start its asset programme in Q4 2014, with the covered bond purchase programme starting in mid-October. Once completed, the programme will increase the ECB’s balance sheet to 2012 levels.

“The overall macroeconomic backdrop remains weak, with anaemic credit growth. Geopolitical concerns have also weighed on consumer and business confidence.

“The ECB continues to look at a broad measure of inflation expectations and short and medium term inflation expectations remain low, including the 5 year five year inflation swap pricing in medium term inflation of just over 2%. Government bond market prices s in Europe have not moved very much on the day, with the benchmark 10 year Bund yield up 0.02% at 0.92%.”

Euro Finds Higher Ground

The euro found higher ground as the dollar edged off two-year peaks and market players camped along the sidelines to hear the latest monthly press conference from ECB chief Mario Draghi.

“The euro is days removed from tipping below $1.26, an expected move after area inflation decelerated to a record low 0.3 percent and manufacturing contracted in Germany. The barely in the red German PMI offered concrete evidence of how the crisis in Ukraine and sanctions against Russia were taking a toll on the bloc’s primary growth engine,” says Joe Manimbo at Western Union.

Manimbo reckons that over the short-run, a break could soon be on the way for the euro but its broader and long-term prospects still appear as bearish as ever.

Commenting further the analyst says:

“Ride out the interim uncertainty with a forward contract and lock down the best market in a very long time which offers significant savings compared to the spring when the euro had flirted with $1.40.

“The euro got an initial rise out of opening remarks from Mr. Draghi’s news conference. The central bank chief’s remarks, though, appeared designed to put fresh downward pressure on the euro’s exchange rate as he said recent policy stimulus would have a ‘sizeable impact’ on the bank’s balance sheet. Moreover, Mr. Draghi sees ‘significant and increasing’ divergence in monetary policy at the ECB compared to others like the Fed.”


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