The euro firmed against the dollar ahead of a European Central Bank meeting where traders hope policymakers will provide clues on how they plan to tackle the common currency’s recent strong gains.
The European currency, which has gained about 10 per cent against the dollar since the coronavirus pandemic began its sweep through Europe and the US in March, rose a further 0.25 per cent on Thursday morning to $1.1830.
At the same time as the euro has strengthened, making European exports less competitive, the eurozone has also slipped into deflation, with consumer prices falling by an unexpected 0.2 per cent in August — their first such fall for four years.
In recent months comments from ECB policymakers, led by president Christine Lagarde, have focused on eurozone unemployment and threats to the bloc’s nascent recovery from the economic damage wrought by the pandemic. In July, the ECB governing council also hit pause on monetary stimulus measures that it had ramped up over the previous four months, having released a €750bn emergency asset purchasing programme in March.
Investors expect the ECB not to announce any major shifts in monetary policy on Thursday, while potentially shifting its dialogue towards inflation and the euro’s gains. A willingness to extend asset purchases has also become priced in to European government debt, with yields on German 10-year Bunds — which fall as demand for the securities rises — hovering around a two-week low at minus 0.463 per cent in early European trades on Thursday.
“The impact of the pandemic on market stability is receding,” said Wolfgang Bauer, who manages bond funds for asset manager M&G.
“We could therefore see something of a strategic pivot towards the inflation outlook,” he added, as well as “strength in the euro”.
Federal Reserve governor Jay Powell said last month the US central bank was willing to tolerate higher inflation to compensate for weakness in the world’s biggest economy, potentially applying pressure on Ms Lagarde to do the same or accept the euro’s continued appreciation.
European equities opened steady on Thursday morning, having gained in the previous session as US markets began to recover from weakness inspired by sharp falls for highly-valued technology stocks. The region-wide Stoxx 600 edged 0.2 per cent higher, while Germany’s Dax traded flat.
On Wednesday, Wall Street’s tech-heavy Nasdaq Composite rose 2.7 per cent to halt a three-session drop that had put the index in correction territory. The broader S&P 500 finished 2 per cent higher.
In the UK, where investor confidence has been rocked by signs that the government is willing to breach international law to unstitch key parts of the Brexit withdrawal treaty, the FTSE 100 was down 0.1 per cent.
Sterling added 0.2 per cent against the dollar to $1.3013, following volatile recent sessions driven by Brexit deal nerves.
Oil prices steadied after rallying alongside equities on Wednesday, with Brent crude, the international benchmark, trading flat at $40.81 a barrel.
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