The euro dropped yesterday to a three-week low of $1.1662 after minutes from the ECB’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.
Policymakers warned that easy financing conditions “could not be taken for granted” and depended on the ECB’s easy policy,
“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,” Simon Derrick, chief market analyst with Bank of New York Mellon in London said.
“I think it is entirely possible you could see further downward pressure on the euro from here.”
Government debt from the eurozone’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 two-to-four basis points.
The currency weakness sent stock markets higher.
European stocks and eurozone stocks jumped to a session high after the ECB minutes, both turning positive before retreating to previous levels, down 0.1% on the day.
“We have seen the periphery outperform today on this cautious note from policymakers,” said Mizuho strategist Peter Chatwell.
Yields were already under downward pressure when details of the US Fed July meeting, released late on Wednesday, showed concerns that soft inflation data may cool the pace of monetary tightening in the world’s largest economy.
The Fed has raised its benchmark overnight lending rate twice this year and forecasts one more rise before the end of 2017. But money market pricing suggests investors see less than a 50% chance of a hike by December. “Fed communications are cementing expectations of a very gradual approach to monetary tightening,” Mr Chatwell said.
Central bankers are set to meet next week in an annual gathering of policymakers at Jackson Hole, Wyoming, though it was reported on Wednesday that ECB head Mario Draghi will not deliver a new policy message at the conference.
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