Euro rallies to 10-day high after ECB says to discuss unwinding stimulus

LONDON - 6 June 2018: The euro rose to a ten-day high on Wednesday after European Central Bank officials said an end to the bank’s bond-buying programme by end-2018 was plausible and that inflation was rising back to its target.

ECB chief economist Peter Praet said on Wednesday the central bank will next week debate whether to gradually unwind bond purchases when the central bank holds its policy meeting.

The head of Germany’s central bank, Jens Weidmann, said market expectations for an end to bond-buying by end-2018 were plausible.

Having revived growth with an unprecedented 2.55 trillion euro ($2.99 trillion) bond purchase scheme, ECB policymakers have been debating whether to end the purchases by the close of the year as the threat of deflation is long gone and the bloc is on its best growth run in a decade.

Many traders have thought the ECB would seek to avoid causing a ripple at its next policy meeting on June 14 given the uncertainty caused by the Italian political situation.

But the ECB officials’ comments pushed the single currency up 0.4 percent to a ten-day high of $1.17580.

“ECB forward guidance burst back on to the scene and...tipped the balance of sentiment on the single currency higher,” said Ken Odeluga, a market analyst at City Index.

The euro has gained about 0.8 percent so far this week and gained about two cents since hitting a 10-month low of $1.1510 on May 29.

The ECB comments followed a speech by Italy’s new Prime Minister Giuseppe Conte, whose promise of radical change had mixed blessings for the euro.

While his reassurance that leaving the euro was not on his agenda helped to underpin the common currency, the new government’s tax cuts and higher welfare spending plan lifted Italian bond yields, undermining investor confidence.

“The market will start to focus on the ECB from now on. Politics in Italy and Spain will play second fiddle as we now have new governments in both countries,” said Kazushige Kaida, head of foreign exchange at State Street Bank.

The British pound was firm at $1.3401, having gained on Tuesday on a strong UK service sector survey, also extending its recovery from a six-month low of $1.3205 set on May 29.

The Australian dollar rose after the country’s GDP data beat market expectations, nearing a six-week high.

The Canadian dollar and the Mexican peso came under renewed pressure after White House economic adviser Larry Kudlow said that President Donald Trump was considering holding separate talks with Canada and Mexico.

That added fuel to speculation the United States could scrap the North American Free Trade Agreement (NAFTA).

The Canadian dollar had fallen to a 2-1/2-month low of C$1.3068 per U.S. dollar on Tuesday, though it edged up in Asia on Wednesday after a media report that Treasury Secretary Steven Mnuchin is said to have urged Trump to exempt Canada from tariffs.

The Brazilian real fell 1.8 percent to 3.81 per dollar as a poll showed increased polarisation ahead of October presidential elections, with far-right lawmaker Jair Bolsonaro leading the ballot followed by centre-left populist Ciro Gomes.