Euro takes a dip as sterling eases

Pound comes off two-week high as markets factor Tory victory into British elections

THE euro dipped against the dollar yesterday after the European Central Bank (ECB) kept interest rates on hold, while sterling eased from a two-week high as markets priced in an election victory for Britain’s Conservative Party.

The ECB dropped a reference to further interest rate cuts, while repeating it expects rates to remain at record lows for an extended period and well beyond its asset purchase programme.

The euro dropped to $1.12 (R14.46) from $1.41 following the statement.

“They have omitted the guidance that interest rates might be cut, but they have kept all their other easing measures in place and the comment that quantitative easing could be extended if needed,” Sonja Marten, senior forex strategist at DZ Bank in Frankfurt, said.

“Maybe the market was looking for a more hawkish signal.”

The euro has risen 10 percent against the dollar in the past five months, partly due to the greenback’s weakness, but also on the view that rising inflation would prompt the ECB to raise interest rates in early 2018.

But reports on Wednesday that the ECB would cut its inflation forecasts have dampened expectations of the bank’s language veering towards a pullback of its stimulus programme, also known as quantitative easing, later this year.

Sterling traded at $1.29, coming off a peak of $1.29 in the morning European trade, its highest level since May 25.

A final opinion poll published yesterday as Britons vote in a national election showed Prime Minister Theresa May’s Conservatives widening their lead to 8 percentage points from 5 points, suggesting her gamble to call the vote to strengthen her position in Brexit negotiations will pay off.

“Confirmation (of investors’ expectations of a Tory win) may support the pound against the euro and the dollar, but it does feel like some positives might be already baked into the price,” said Valentin Marinov, head of forex strategy at Credit Agricole in London.

“That also means that any potential disappointment, ie a Tory majority being eroded as a result of the snap election or a hung parliament could be pretty damaging for the pound.”

The dollar recovered some of its losses against the safehaven yen, up 0.3 percent to 110.11 yen per dollar. The index that measures its broader strength was up 0.2 percent at 96.931.

Investors were closely monitoring US Senate testimony by former FBI director James Comey late yesterday, worried this could dampen already flagging momentum for US President Donald Trump’s agenda of rolling back regulation and overhauling the tax code.

In written testimony, Comey – fired by Trump last month – said that the president asked him to drop an investigation of former National Security adviser Michael Flynn as part of a probe into Russia’s alleged meddling in the 2016 presidential election. – Reuters