ECB Expectations Drive EUR and Bonds Down

The euro hit its lowest level against the dollar in nearly a year and euro zone government bond yields fell to record lows on Tuesday on expectations the European Central Bank might ease monetary policy as soon as next week.

The single currency fell as low as $1.3178 in Asian trade, its weakest since Sept. 9, before recovering slightly, in response to ECB chief Mario Draghi’s comments last week that he was ready to use all available tools if euro zone inflation fell further. Draghi also called for fiscal policy to play a greater role in reviving the economy.

The next ECB policy meeting is on Sept. 4. Preliminary euro zone data due on Friday are forecast to show annual inflation was just 0.3 percent this month, down from 0.4 percent in July, well below the ECB’s target of just under 2 percent.

 
“If it is confirmed over the next few weeks and months that inflation goes closer to zero, they (the ECB) will have to buy everything they can and inflate the balance sheet,” said Frederik Ducrozet, senior euro zone economist at Credit Agricole. “There is no other option.”

European shares rose, extending gain made on Monday in trained thinned by a UK market holiday. The FTSEurofirst 300 index .FTEU3 was last up 0.4 percent at 1,371.34.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza