Euro builds on 2017 high as Mario Draghi puts ECB tapering firmly on the agenda

 
Jasper Jolly
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Draghi's positive outlook put the cat amongst the pigeons for euro traders (Source: Getty)

The euro has surged to a new 2017 high in Wednesday morning trading as investors continue to adjust to hints of the tapering of quantitative easing from European Central Bank (ECB) president Mario Draghi.

Against the US dollar the euro reached highs of $1.1389, a gain of around 1.7 per cent from yesterday’s lows before Draghi spoke.

Meanwhile German 10-year bond yields, the European benchmark, surged from 0.238 per cent to reach highs of 0.405 per cent, the highest in a month. Yields move inversely to prices, which were depressed as investors moved money out of bonds.

In comments delivered yesterday at the ECB’s central banking forum in Portugal, Draghi said the rate-setting governing council might consider adjusting its monetary policy to take into account higher growth.

He said: “The central bank can accompany the recovery by adjusting the parameters of its policy instruments – not in order to tighten the policy stance, but to keep it broadly unchanged.”

The market has taken that to mean an implicit sign the central bank will slowly stop purchasing assets under the quantitative easing programme. The asset purchases are aimed at pushing banks to move money out of bonds so they can lend, but their side effects has been increased demand for government bonds, keeping yields low.

The ECB is set to continue purchasing €60bn (£53bn) in assets every month until December, making a decision on the future of the programme imminent.

The improving European political outlook (which Draghi implicitly linked to the election victory of Emmanuel Macron as French President) could add to the improving economic dynamics supporting a tightening.

However, Draghi also stressed any change in policy must be gradual.

He said: “There are strong grounds for prudence in the adjustment of monetary policy parameters, even when accompanying the recovery.”

Draghi’s comments do suggest some adjustment to the central bank’s stance, according to Derek Halpenny, European head of global markets research at MUFG.

He said: “There was certainly a greater emphasis on highlighting the positives in contrast to the ECB monetary policy press conference when perhaps the focus was more on playing down the progress in order to diminish any exaggerated move.”

The ECB’s policymakers meet next in July, but a decision on tapering may not be made until September, according to Mantas Vanagas, an economist at Daiwa Capital Markets.

Vanagas said: “While the ECB does look set to start tapering its asset purchases once its current schedule expires at the end of the year, that tapering will be gradual. Look out for an announcement of its post-December policy settings at the Governing Council’s September meeting, with a reduction in monthly asset purchases from the current €60bn per month.”

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