Goodbye ECB Bond-Buying, Hello Forward Guidance

Posted June 17, 2018

It's a sign of confidence in the economy, but with uncertain consequences for consumers and businesses.

While the Federal Reserve and the ECB provided much of the week's central bank fireworks, the Bank of Japan produced no surprises at the end of a two-day policy meeting on Friday and looked set to continue its asset purchases for some time.

The central bank has undertaken an unprecedented programme of stimulus since the eurozone debt crisis.

The ECB continued to stress in recent meetings that any interest rate hikes, which remain the key to foreign exchange market movements, are a long way off.

"The news are not as good as they were a quarter ago, but they are still solid", he said. Break of the May-low (1.1510) opens up 1.1390 (61.8% retracement), with the next region of interest coming in around 1.1210 (61.8% retracement) to 1.1220 (78.6% retracement). Hong Kong's Hang Seng index dropped 0.9 percent to 30,440.17 and the Shanghai Composite Index was down 0.2 percent to 3,044.16.

More news: We may not be hosts soon but we can take notes

The ECB said it would taper its bond-buying programme down to 15 billion euros a month in the fourth quarter from 30 billion euros a month now in a move that broadly met market expectations. They would then be wound up completely after December.

The benchmark main refinancing rate remains at zero and the deposit rate at minus 0.4 per cent. In 2017 unemployment in the Eurozone stood at 8,5%, which is the lowest in a decade but still not quite as low as other major economies.

Both the European Central Bank and Fed moves will allow market borrowing rates to rise gradually. But it could also increase returns for savers and make it easier for pension savings to grow.

The Canadian dollar weakened to a fresh near one-year low against its US counterpart as trade tensions between USA and China intensified and domestic data showed a surprise drop in manufacturing sales.

Mario Draghi, the ECB's president, said at the end of a meeting of the bank's governing council in Latvia, that the QE programme had succeeded in its aim of putting inflation on course to meet its target of being below but close to 2%. "Draghi's last Press Conference and Q&A is on 24 October 2019 (he leaves the European Central Bank at the end of October 2019) - so the focus will now be on whether he can raise rates before he departs". The coalition between the anti-establishment 5-Star Movement and the anti-immigration League have promised spending that could lead to Italy violating eurozone limits on deficits. The initial plan was to buy bonds worth Euro 1 trillion.

More news: Trump and Kim Jong-Un to hold private meeting

The kiwi rose to 93.24 Australian cents from 92.89 cents late yesterday, when figures showed the number of people employed in Australia rose by 12,000, undershooting an expected 19,000 increase.

The size of the stimulus was enormous: At €2.7 trillion, it rivals the entire value of the French economy past year.

The stimulus has also pushed up the prices of investments likes stocks and bonds. The Dow and Germany's DAX both touched record highs earlier this year.

The yield on the 10-year Treasury fell to 2.93 percent from 2.98 percent late Wednesday.

More news: United Kingdom government wins key Brexit parliamentary battle