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Euro touches two-year low as ECB signals stimulus and rate cut

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Jul 25, 2019: The euro slid to a two-year low on Thursday after the ECB signalled it could undertake new stimulus measures and cut rates to boost flagging growth and inflation in Europe.

German government bond yields hit new lows on the prospect of the European Central Bank resuming purchases of government bonds, while European stocks fell on downbeat comments by ECB chief Mario Draghi about the outlook for the eurozone economy.

Meanwhile the pound rose after new UK Prime Minister Boris Johnson said the current deal for Britain to exit the EU was unacceptable and that preparations for a no-deal Brexit were top priority.

The ECB, which has already cut its key interest rates to historical lows and pumped unprecedented volumes of cash into the financial system via the so-called QE bond-buying scheme, had until recently been trying to move to where it could raise interest rates.

But with inflation and growth both slowing, analysts widely expected that ECB officials would signal a change in the direction of monetary policy at their Thursday meeting.

While they left the rate on the bank's main refinancing operations at zero, on its marginal lending facility at 0.25 percent and on its deposit facility at -0.4 percent, it hinted they could fall further by saying they would be kept at “their present or lower levels at least through the first half of 2020”.

Moreover, the central bankers said they have tasked officials to look at options, including “new net asset purchases”.

“There are only two policy-setting meetings left for Mario Draghi beyond today and he will want to go out with a bang,” said Ken Wattret, chief European economist at IHS Markit.

“An announcement of a range of easing measures (at the ECB's next monetary policy meeting) on 12 September looks like a done deal,” he added.

While the euro fell as low as $1.1102, a level last seen in May 2017, it later snapped higher when Draghi began his post-meeting press conference.

“It's not so much that (Draghi) said anything particularly hawkish but he did seem a little cautious and the overall tone suggests the markets may have gotten a bit ahead of themselves in the initial reaction,” said David Cheetham, chief market analyst at online trading firm XTB.

Meanwhile market analyst David Madden at CMC Markets pointed out that Draghi called on governments to increase support for the economy.

“The fact Mr Draghi called on fiscal stimulus suggests that he is afraid that monetary tools won't fix the region's problems. The update wasn't as dovish as expected, and that prompted the sell-off in stocks,” he said in a note to clients.

US stocks moved lower in midday trading, coming off record closes the day before.

Earlier in Asia, gains in stock markets were tempered by the emergence of doubts over a US-Chinese trade meeting next week and the announcement of massive job cuts at beleaguered Japanese carmaker Nissan.

Nissan announced after the market close that it would shed 12,500 jobs, following a 95-percent net profit plunge in the first quarter to $59 million.

AFP/APP

Posted on: 2019-07-25T21:10:00+05:00

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