Clear signals of looser policy ahead from central banks in the UK and Europe yesterday sent the euro to a five-week low, lifted bond prices and gave a boost to share markets.
The statements by the European Central Bank and the Bank of England were aimed at supporting their economies in the face of a withdrawal by the US Federal Reserve from its money-printing programme.
“Both the ECB and the Bank of England are trying to offset the changes the Fed is seen making,” said Ned Rumpeltin, head of G10 FX strategy at Standard Chartered.
The diverging policy outlook on either side of the Atlantic sent the euro down one per cent to $1.2883, German 10-year bond yields to a two-week low and gave European shares their best day in 11 months.
More sharp moves could follow today if US jobs data for June boosts expectations of an early start to the Fed’s plan to reduce its $85 billion a month of bond purchases.
The ECB and the Bank of England left their key interest rates unchanged at regular monthly policy meetings amid evidence of a fragile recovery in their economies. However, in a big break with tradition, both banks offered guidance on the rate outlook.
ECB President Mario Draghi said interest rates in the currency bloc would stay where they are for an extended period or even fall.
“The Governing Council expects the key ECB rates to remain at present or lower levels for an extended period of time,” Draghi told a news conference.
Earlier, at former Canadian central bank chief Mark Carney’s debut policy meeting as governor, the Bank of England said market pricing for future interest rate rises was “not warranted by the recent developments in the domestic economy.”
Sterling fell 1.3 per cent after the BoE statement to hit $1.5074, its lowest since May 29, while London’s FTSE 100 rallied to close up 3.1 per cent.
European shares jumped 3.1 per cent, for their biggest one-day rise in a month, helping lift MSCI’s world equity index by 0.6 per cent.
US markets were closed for the Independence Day holiday but had previously made gains on Wednesday as investors positioned for the monthly jobs data.
In fixed income markets the hints of a possible ECB rate cut ahead sent 10-year German bond yields to a low of 1.6 per cent and those on riskier Spanish and Italian debt also fell.
The positive tone was enough to reverse a rise in Portuguese debt yields, which have spiked on rising political tensions after the resignation of two government ministers this week that put Lisbon’s hopes of exiting its EU/IMF programme in doubt.
“As long as Portuguese bond yields start heading back down again and we don’t see contagion into the rest of the periphery, my expectation is that Europe slowly gets better from here,” said Alistair Gunn, fund manager at Jupiter. (Reuters)