Shares rise, euro near 14-month high ahead of European Central Bank

Robyn Valdez
July 21, 2017

The euro was near a 14-month high as ECB head Mario Draghi's 1230 GMT post-meeting news conference approached, where the main question will be how close the bank is to winding down its 2 trillion euro stimulus programme.

"The market is already working off the assumption that the European Central Bank will gradually phase out bond buying, with the program likely ending by the end of next year, possibly even the third quarter".

The bond-buying programme, together with ultra-low interest rates, was created to fend off the threat of deflation hitting the eurozone.

The program's goal is to raise inflation to just under 2 percent from the current 1.3 percent, and Draghi said that right now "there really isn't any convincing sign of a pickup in inflation", a remark he repeated several times in slightly different form.

The UK blue-chip index closed 58 points, or 0.8%, higher at 7,489, as the pound tumbled against the soaring euro, down 1.3% at €1.116.

However, M&G fixed interest investment director Anthony Doyle says tapering of asset purchases, which he anticipates will be addressed at the September meeting, represents a reduction in the degree of monetary stimulus rather than a fast interest rate tightening cycle.

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Draghi emphasised the weakness of inflation across the Eurozone.

"They are going to try and not upset markets", said Nick Gartside, worldwide Chief Investment Officer of fixed income at JP Morgan Asset Management.

The pound plummeted by nearly 1% as David Davis and the European Union's Michel Barnier revealed the two sides disagree over Britain's exit payment.

"In our view, this is a clear sign that the European Central Bank does not want to pour more oil on the small taper tantrum fire seen in financial markets over the last few weeks".

United Kingdom government deficit figures are expected to have shown an improvement upon the previous month, with the spending shortfall anticipated to have shrunk by around -£1.7 billion.

The bank decided Thursday to keep key interest rates for the euro area at record lows. "In the base case, the European Central Bank will likely reduce its monthly asset purchases by €5-€10bn euros per month beginning in January 2018, and conclude a taper of QE in the second half of 2018", chipped in Bill Adams, senior worldwide economist at PNC Financial Services.

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That hint did not come with the statement unchanged from the bank's June meeting.

Today's EUR/GBP exchange rate gains occurred despite the fact that Sterling had some seemingly good news this morning as this month's United Kingdom retail sales figures beat expectations.

'Our outlook is optimistic and we aim to achieve growth in underlying earnings in the region of approximately 5% to 15% during 2018, ' said chief executive Mike Ashley.

The bank has said the purchases will run at least until the year's end.

The ECB has kept interest rates unchanged since March 2016, when all three were cut.

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