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Is the ECB running on fumes?

Is the ECB running on fumes?

The European Central Bank (ECB) chose to leave its current monetary policy measures in place yesterday. More surprisingly, in the press conference, Mr Draghi stated that there had been no discussion of any extension to the bond purchase programme. He also commented that no additional stimulus was needed at this time given that there had been only a slight downward revision to inflation forecasts in the latest staff projections.

Mario Draghi noted that the ECB had all the tools and willingness to further ease monetary policy, it was just that they did not want to do it. This is a clear attempt to reassure investors who claim that the ECB has run out of ammo.

Small adjustments to the ECB’s GDP growth and inflation projections were made. The GDP growth forecast for 2016 rose to 1.7% (from 1.6%), but the bank cut its forecasts for 2017 and 2018 to 1.6% (from 1.7%). The HICP inflation forecast for 2017 was reduced to 1.2%, from 1.3%, but kept forecasts for 2016 and 2018 unchanged at 0.2% and 1.6% respectively. The ECB also projects core inflation of 1.3% in 2017 and 1.5% in 2018, which seems optimistic to say the least. The single currency finished up by 0.5% against Sterling, ending the day at 1.1804 levels.

Sterling was suffering after Mark Carney’s comments on Wednesday that interest rates could be cut again. The ECB rate decision provided a sharp rise for UK bond yields, but Sterling was unable to move above the 1.3400 area versus the Dollar and saw resistance as the selling pressure increased. The Pound failed to gain any initial support from a fresh surge in oil prices and dipped to just below 1.3300 against the Dollar overnight before a limited recovery this morning.

The Dollar witnessed a positive day during yesterday’s trading session as the jobs report figures came in better than expected. Continuing jobless claims printed at 2.144m along with a low reading for the initial jobless claims at 259K, maintaining confidence in the labour market.

The US currency strengthened by 0.3% versus Sterling, ending the day on 1.3306. Comments from Fed speakers will continue to be monitored very closely given that the September interest rate decision approaches.

Data To Watch: 7am EU German Imports & Exports, Trade Balance. 9.30am UK Consumer Inflation Expectations. 6pm US Baker Hughes Oil Rig Count.

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