European Central Bank announces end of bond buys, sees rates stable until summer 2019

Sean Reid
June 17, 2018

Asian shares wobbled on Friday as investors braced for U.S. 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 Trump administration is set to release its final list of Chinese products that will be subject to 25% tariffs by Friday, with the US President reasserting vows to pursue aggressive trade action in the coming weeks against China. Beijing has warned that it was ready to respond.

While it is not clear when Trump will activate the measures, rising Sino-US trade tension will put additional pressure on China's economy, which is starting to show signs of cooling under the weight of a multiyear crackdown on riskier lending.

The concerns are that there's still an unsure economic outlook, which could be complicated by a developing trade war with the United States. With market pricing for four hikes jumping to close to a 50%, we now await any surprises from the European Central Bank to see the next trend in EUR/USD. "This is likely to weigh on market sentiment over the summer".

The Euro slipped against other currency majors, tumbling by it's biggest amount since 2016 versus the Dollar, with a 1.9% fall.

The reaction to the European Central Bank meeting has largely wiped out the advance from the May-low (1.1510), with the break of the recent range raising the risk for a further decline in EUR/USD especially as the Relative Strength Index (RSI) flashes a false signal and largely tracks the bearish formation from earlier this year.

The dollar's index against a basket of six major peers rose on Friday to as high as 95.131, its strongest since November 7, and the greenback was up roughly 1 percent versus its Japanese peer on the week.

Demand for the 10-year German Bund sent its yield 6 basis points lower to 0.43 per cent.

In its statement, the central bank added that the rates would stay subdued as long as necessary to ensure euro zone inflation remains on path to hit the central bank's target of just below 2 percent.

"Against the background of uncertainties in the world today - such as trade - this makes sense, as does the emphasis on data dependency".

On Wall Street, two of the three main indexes closed higher, with technology stocks leading the charge on the benchmark S&P 500.

This was the largest gain in six months and was seen as a strong indicator of accelerating economic growth in the second quarter.

"Quantittatitative easing", or "quantitative easing", is the policy whereby central banks buy up what are essentially like shares in a government, called "bonds", from banks.

Oil prices were down, facing pressure from evidence of rising USA output and uncertainty over supply, before a meeting next week of the world's largest exporters.

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