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European Central Bank seeks balance to keep low-inflation recovery on rails
28 January 2018, 12:16 | Vera Richards
Surprise Uptick in UK Earnings Dents Euro to Pound (EUR/GBP) Exchange Rate
With the European Central Bank staying away from what appears to be the early stages of a currency war - following US Treasury Secretary Steve Mnuchin's comments in Davos - the Euro was able to surge above 1.2500 versus the US Dollar for the first time since December 2014.
"While it is by now widely recognised that euro area growth is strong, the extent of this is still being hugely underappreciated", JPMorgan economist Greg Fuzesi said before the rate decision.
Speaking in Davos, where he is attending the World Economic Forum, Mr Trump said "frankly nobody should be talking about the dollar's value" before adding he supported a strong United States currency. The company's bottom line was hurt by rising commodity costs and unfavourable currency exchange rates, and it expected more pain to come from higher raw material prices in 2018.
And he said recent exchange rate volatility had been sparked by "the use of language that doesn't reflect the terms of reference we have agreed".
'We believe 2018 could again be a year in which Eurozone growth beats expectations, but still inflation is not picking up as wage growth remains weak. The region gathered momentum in January, with the Purchasing Managers' Index suggesting quarterly growth of 1 percent and German business confidence at a record high. The GBP/EUR exchange rate dropped a cent and the EUR/USD rate moved to a 3 and a half year high.
From this month, the European Central Bank has halved the amount of cheap cash it is pumping into the system under its quantitative easing programme to 30 billion euros ($37.3 billion) per month, and now envisages halting asset purchases in September. During the press conference, ECB President Draghi carried on with dovish tone, noting in particular that domestic inflationary pressures continue to be weak.
The currency hit the $1.25 level against the USA dollar around 2:00 p.m. London time and was on track for its biggest weekly rise since May of a year ago.
The professionals' predictions now see inflation hitting 1.5 percent this year, 1.7 percent in 2019 and 1.8 percent in 2020.
Quizzed on the chances of ending stimulus, Draghi said there was a need to distinguish between a sudden stop, extension of the asset purchase programme and gradual tapering. "We're purely trading off Europe", said Tom di Galoma, managing director at Seaport Global in NY.
Mr Draghi cited an International Monetary Fund communique from past year, signed by the U.S., which said: "We will refrain from competitive devaluations, and will not target our exchange rates for competitive purposes". "We look at inflation, that is our main concern".
After the close of trading on Thursday, results are expected from Intel Corp and Starbucks Corp.
Yet even as the euro zone economy roars ahead, a strong euro threatens to dampen inflation and endanger the work done by the European Central Bank during years of over 2 trillion euros worth of stimulus.
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