ECB fuels dollar rally
By Arnaud Masset
EUR/USD reversed losses Friday as it moved towards 1.16, up 0.22% on the session. USD/CHF fell from 0.9988 to 0.9960. Fundamentals are clearly in favour of further dollar gains; however, in the short-term, the greenback will give some ground as trade war fears linger. Demand for German bunds increased sharply, which sent yields lower. The 2-year and 10-year gave up 5 basis points and 12 bps to -0.63% and 0.39%, respectively. Italian bonds moved in a similar fashion even though the yield reaction was less acute.
Prime mover was the European Central Bank, which announced the end of its quantitative easing program in a dovish manner. The bank will maintain its €15-billion-monthly bond buying until December 2018. However, contrary to expectations, the ECB won’t raise rates simultaneously but rather until at least summer 2019. In addition, the central bank revised its growth forecast to the downside, to 2.1% in 2018, compared to 2.4% in March. Inflation’s forecast was revised upside from 0.4% to 0.7%. This didn’t prevent a massive euro sell-off, which turned into a USD rally.