LONDON: The euro fell to a three-month low against the dollar and stocks and bonds in the region climbed yesterday, after a wobble in German business confidence added to expectations the European Central Bank will cut interest rates next month.
Asian shares had also finished the week strongly, hitting one-year highs, while benchmark US and European bond yields, which move inverse to prices, were heading for rises after a week lacking in clear direction in terms of data and sentiment.
Mario Draghi and his ECB colleagues have been sending clear signals in recent weeks that a rate cut plus a few other unconventional measures are on the cards for next month.
A weaker-than-expected reading from Germany’s closely-watched Ifo business climate index as it fell to its lowest level of the year was enough to convince many ECB action was now a nailed-on certainty.
The euro was down a third of one percent on the day at $1.3621, the lowest in three months and crucially below a technical support level of $1.3636 that had held firm for almost nine months.
It’s a level the single currency has flirted with three times this week but has not closed below it. This could be the first day it has done so since September last year.
“The renewed fall in the Ifo in May suggests that the German recovery may be slowing. We expect annual GDP growth of about 2 percent this year and next, which will not be strong enough to drive a rapid recovery across the euro zone or to eradicate the threat of deflation,” said Jennifer McKeown, senior European economist at Capital Economics. Sovereign credit ratings upgrades on Friday for Spain and Greece had little impact on European markets as their respective economies have been improving for some time.
Investors were also reluctant to take on too much risk ahead of European election results and a presidential election in Ukraine this weekend, and because British and US markets are closed on Monday, which will dry up market liquidity.
“In places like Italy and Greece we don’t have properly elected governments, they are just cobbled together, so this weekend’s results will play on people’s minds,” said Marc Ostwald, a strategist at Monument Securities.
Share markets in Europe suffered a soft start but the ECB expectations had helped them recover by midday and US futures pointed to Wall Street starting steady.
Reuters
