GLOBAL MARKETS-Euro recovers as inflation eases pressure on ECB

Wed Apr 30, 2014 6:48pm IST

Related Topics

* Euro rallies after inflation data cool ECB easing talk

* Caution dominates before Federal Reserve policy decision

* Nikkei ends positive but still sheds 3.5 pct in April

* China's yuan on track for fourth monthly loss

By Marc Jones

LONDON, April 30 (Reuters) - The euro recovered and euro zone government bonds retreated on Wednesday as inflation stayed just about strong enough for the European Central Bank to put off taking any action when it meets next week.

With investors also awaiting the outcome of a U.S. Federal Reserve meeting later and eyeing developments in Ukraine, cautious markets kept moves elsewhere to a minimum.

Futures prices pointed to a flat start to early Wall Street trading after a strong performance over the last two weeks. U.S. government bonds and gold lost ground as traders counted down the final few hours until the Fed meeting, when it is widely expected to keep scaling back its stimulus programme.

In Europe, the ECB has been talking for months about the possibility of further support measures if low inflation becomes entrenched and fighting it is made harder by a strong currency and "unwarranted" rises in borrowing costs.

Figures on Wednesday shown euro zone inflation nudged up to 0.7 percent in April. Though it remained well below the ECB's target rate of just below 2 percent, the figure came as a relief after a weak reading out of Germany on Tuesday.

It saw the euro jump, and by the time U.S. trading gathered pace it had climbed 0.3 percent to $1.3852, within shouting distance of this year's highs above $1.39.

ECB head Mario Draghi said last week that if the inflation outlook were to deteriorate, the ECB could respond with a "broad-based asset purchase programme", probably quantitative easing - effectively printing money to buy assets.

On Monday, however, he told lawmakers from Germany's ruling coalition that while low inflation would persist in the euro zone, he did not expect deflation, according to a source who attended the meeting.

"The two important data for the ECB, inflation today and M3 (money supply) yesterday came in on the weak side which means the ECB is really under pressure, the problem is they have been under pressure for a while," said Philippe Gudin de Vallerin head of euro research for Barclays.

"They are definitely not complying with their mandate... The key is the euro, they really need to weaken the euro but it is not easy."

TAKING STOCK

Euro zone government bonds across the spectrum from Germany and France to Greece and Portugal also switched direction, with prices reversing as the prospect of steady ECB rates reheated concerns about their current value for money.

European stocks, meanwhile, took a breather, having jumped to a near four-week high on Tuesday thanks to combination of strong earnings, merger moves and relief at the mild tone of sanctions imposed on Russia by the West.

Asian shares had struggled while the yen strengthened after upbeat Bank of Japan economic projections suggested no additional stimulus was on the near-term horizon.

Japan's Nikkei stock average edged up on Wednesday but logged a drop of 3.5 percent in April, while China's yuan completed its fourth straight month of losses as it ended April at an 18-month low..

FED MEETING

Later on Wednesday, Fed officials are expected to decide unanimously at the conclusion of their two-day meeting to continue tapering the central bank's massive bond-buying stimulus. Investors will focus on what their statement implies about the monetary policy outlook.

"Fed policy is basically on cruise control while the (policy) Committee waits to see how the economy rebounds from the cold weather, how the labor market is progressing, and whether inflation returns to more normal levels," said Marshall Gittler, head of FX strategy at IronFX Global.

U.S. jobs data - invariably a focus for investors - is due on Friday.

Meanwhile, markets digested some mixed signals from Europe.

In its latest quarterly bank lending survey, the ECB painted a more upbeat picture than it had in Tuesday's disappointing euro zone credit reading, with banks sensing an improvement.

Figures from Madrid earlier showed Spain's economy saw its strongest quarterly growth in six years in Q1 although retail sales both there and in Germany sagged last month.

Market participants continued to track developments in Ukraine, where masked gunmen in military fatigues seized government offices in another town, in a further sign that pro-Western authorities in Kiev are losing control of the country's eastern industrial heartland bordering Russia.

The dollar recovered most of the day's losses on the yen to 102.54 yen, have struck a low of 102.28 yen soon after the BOJ revealed its upbeat forecasts.

In commodities trading, spot gold slipped 0.2 percent to $1,292.80 an ounce as the tensions surrounding producer Russia, as well as a ban in Indonesia, left nickel on track for monthly gain of 15 percent.

U.S. crude dropped 1 percent to $100.27 per barrel, on expectations that U.S. inventories would hit the highest level on record. Brent fell to $108.41 (Reporting by Marc Jones; Editing by Larry King)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

Markets

REUTERS SHOWCASE

Segway in India

Segway in India

Segway’s India business pegs hope on tech-savvy Modi  Full Article 

Power Outage

Power Outage

Mumbai hit by power cuts  Full Article 

Commodities

Commodities

Gold imports, premiums to jump on festive demand - top refiner  Full Article 

Economic Worries

Economic Worries

Pakistan's promises to IMF in doubt as protests sap economy   Full Article 

Islamic Finance

Islamic Finance

Basel III deposit challenge looms over Islamic banks   Full Article 

Antitrust Probes

Antitrust Probes

U.S. business lobby says concerned China antitrust probes unfair.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage