ECB Points to Overshoot

The euro dropped to a three-week low of $1.1662 on Thursday after minutes from the European Central Bank’s July policy meeting showed policymakers were worried about a possible overshoot in the euro.

The move put the single currency, already sharply down on the day against the dollar, on track for its biggest daily loss in more than four months.

The minutes showed rate-setters were highly aware of the risk that the euro could threaten the ECB’s efforts to get inflation higher as they decided against any change to their pledge for continued monetary stimulus last month.

“The euro has shot down as a result. It is a good question of how much further we will go. The reality is the ECB is definitely more concerned than the market gave it credit for,” said Simon Derrick, chief market analyst with Bank of New York Mellon in London. “I think it is entirely possible you could see further downward pressure on the euro from here.”

Government debt from the euro zone’s highly-indebted southern member states – seen as the biggest beneficiaries of ECB stimulus – were most in demand, with the yield on Portuguese and Spanish 10-year government debt dropping 2-4 basis points.

The currency weakness sent stock markets higher.

European stocks and euro zone stocks jumped to a session high after the ECB minutes, both turning positive before retreating to previous levels, down 0.1 percent on the day.

Reuters

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell