The euro rose from a two-month low against the dollar on Thursday, after the European Central Bank failed to deliver an interest rate cut that some investors had expected and after its president Mario Draghi offered a glimmer of optimism about his outlook on the euro zone economy.
Investors prior to Draghi’s comments had priced in a dovish message.
The euro recovered after the ECB, which kept interest rates unchanged, said in its statement rates would stay “at their present or lower levels” and opened the door for more quantitative easing.
Despite Thursday’s gains, the euro’s outlook remained downbeat due to the prospect of further monetary easing.
When the market did not get the cut, that was a signal to cover the shorts on the euro, he added.
Draghi, at his press briefing, said he saw low risk of recession in the euro zone, but noted that a rebound in the second half was less likely, as he voiced concerns about stubbornly low inflation.
In mid-morning trading, the euro rose 0.3% to $1.1170, after earlier dropping to a fresh two-month low of $1.1102.
· The dollar index rose 0.1% to 97.81.
The greenback gained against the yen, however, rising 0.3% to 108.47 yen after a batch of generally positive U.S. economic data.
New orders for key U.S.-made capital goods surged 1.9% in June, while weekly jobless claims declined to 206,000 in the latest week.
· The European Central Bank has hinted it could cut interest rates to tackle a slowdown in the eurozone economy.
It said a weak manufacturing sector and uncertainty over Brexit and trade threatened to derail growth in the bloc.
Eurozone interest rates have been held near zero for years to stimulate growth, and the bank had hoped to raise them gradually.
ECB boss Mario Draghi said there were some bright spots in the eurozone economy, such as in services and construction, but added that "the outlook is getting worse and worse", especially for manufacturing.
He blamed uncertainty caused by trade tensions and "the possibility of a hard Brexit".
Eurozone inflation remains well below its 2% target.
The ECB, which kept interest rates on hold on Thursday, said it saw rates at current or lower levels until mid-2020.
It is also considering other measures to support the eurozone, including resuming quantitative easing.
This is when a central bank pumps money into the economy by buying up bonds and other assets.
· Europe’s head central banker was less inclined Thursday to interest rate cuts and monetary stimulus than expected, and his tone convinced markets that the Federal Reserve will have a similar stance at its meeting next week.
The outlook now is that the Fed will trim rates by just a quarter percentage point, not a half point, as some had suspected.
· Billionaire hedge fund manager Kyle Bass is doubtful a trade deal between the U.S. and China could be reached and believes the Federal Reserve’s rate cuts are less effective these days.
“Every deal that the Chinese have signed up with us since their inception into the WTO since 2001, China never lives up to their promises,” the founder and chief investment officer of Hayman Capital Management said on CNBC’s Closing Bell on Thursday.
American and Chinese negotiators will meet for face-to-face talks next week after the negotiations fell through in May. Treasury Secretary Steven Mnuchin said there are a lot of issues for the two countries to work out.
Investors are now betting that the Fed is going to cut interest rates at its policy meeting next week and that there will be more easing this year to sustain the record-long economic expansion. However, Bass said the central bank’s primary tool has lost some of its mojo.
“We believe rate cuts are less and less effective once you’ve been at a zero rate bound...They will have less efficacy. I think in early 2020, you are just going to see softness in the U.S. economy. We might have shallow recession, but if we do and we will immediately go to zero rates,” Bass said.
· North Korean leader Kim Jong Un inspected the demonstration of a “new-type tactical guided weapon” on Thursday as a warning to South Korean “warmongers” to stop importing weapons and conducting joint military drills, state media said on Friday.
The U.S. State Department urged Pyongyang to refrain from further provocations and said it still hoped for a resumption of the working-level talks stalled since a failed summit in Hanoi in February.
U.S. Secretary of State Mike Pompeo said Washington continued to see a diplomatic way forward and anticipated new talks “in a couple of weeks.”
· Oil prices rose on Thursday amid Middle East tensions and a big fall in U.S. crude stocks, but gains were capped as weak Western manufacturing data indicated slowing economic growth and in turn the potential for reduced fuel demand.
Brent crude futures rose 28 cents or 0.4% to $63.46 a barrel, after dropping 1% on Wednesday - the first fall in four sessions.
U.S. West Texas Intermediate crude settled up 14 cents, or 0.3%, at $56.02 a barrel, having dropped 1.6% in the previous session.
U.S. crude stocks fell by nearly 11 million barrels last week, the Energy Information Administration reported on Wednesday, well above analysts’ expectations for a drop of 4 million barrels.
Oil prices have also been under pressure from concerns about global economic growth amid growing signs of harm from the U.S.-China trade war that has rumbled on over the last year.
However, the White House said on Wednesday top U.S. and Chinese negotiators would meet next week to continue talks, and global equities edged up on the news.
· U.S. Secretary of State Mike Pompeo said in a television interview on Thursday that he would go to Iran for talks if it was necessary, amid tensions between Tehran and Washington.
Iran tested what appeared to be a medium-range ballistic missile on Wednesday that traveled about 1,000 km (620 miles), said a U.S. defense official, who spoke on condition of anonymity. The test did not pose a threat to shipping or any U.S. personnel in the region, the official said.
Reference: CNBC, Reuters, BBC
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