(MENAFN– ecpulse) The euro lost grounds against the dollar for the third week in a row, hurt by European Central Bank’s commitment to low borrowing costs for a longer period and the United States’ jobs report of a surprising increase in Non-Farm Payrolls in June.
Europe was on market watch once again last week, with ECB taking a decisive step toward telling markets what they expect to do in the future, abandoning a longtime practice of saying it ‘never precommits’ on interest rate decision.
Euro had been weaker in recent days, amid political tensions in Portugal after the resignation of two government ministers last week put its hope of exiting its bailout program in doubt. Portuguese 10-year yields, an indicator of the cost the government would have to pay to borrow, rose above 100 basis points last week. Oil prices rose above $100 a barrel last week on the back of the unrest in Egypt that led to the ouster of President Mohammad Morsi.
Markets law week saw both the ECB and the Bank of England (BOE) changing their tactics, following a strategy that has been used by the U.S. Federal Reserve, the Bank of Canada, and recently the Bank of Japan, in an effort to change expectations, to push back against the idea that those central banks, unlike the Fed’s, will get into interest-rate-hiking mode the minute their economies start to improve.
In fact, the ECB and the BOE both took non-traditional step of offering explicit guidance on low future interest rates last week, in what amounted to a transatlantic respond to hints of tightening by the U.S. central bank.
The BOE’s Monetary Policy Committee voted Thursday to keep the main refinancing rate at 0.50 percent and size of asset purchases at 375 billion pounds.
The ECB’s Governing Council also left the rates unchanged at its record low of 0.50 percent. After holdings the rates for second month in a row, President Mario Draghi signaled that ECB will remain accommodative as long as needed while he said rates to stay low for an extended period of time.
Draghi has also considered the idea of cutting the ECB’s short-term interest rate target even further, even as it could push a key bank deposit rate into negative territory, where he suggested in his press conference that option is still on the table.
The Bank of England, holding its first monetary policy meeting under Governor Mark Carney, was a little more subtle, but is quite clearly pushing the same direction. BoE’s language was more dovish than expected, increasing expectations that monetary policy will remain accommodative for some considerable time.
ECB’s comment ignited a selloff in both the Euro and the Pound and also kicked stocks higher and helped take pressure of European interest rates. The already pressured euro hit its weakest level since May, falling nearly 1 per cent to dip below $1.29 after Draghi’s forward guidance on interest rates.
Moving to the United States, where markets received a long-awaited surprise – U.S. Non-farm payrolls increased 195 thousand in June, adding to signs the labor market is recovering at quicker pace, and most importantly, supporting the case for near exit from the Fed’s stimulus program.
The upbeat NFP number flirted with the dollar, after its beat analysts’ median forecast of 165 thousand increases last month. May’s estimate was also revised higher to 195 thousand, which also helped pushing the dollar higher against a six-currency basket.
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