Economy

German bonds tad higher ahead of July industrial production, European Central Bank policy decision

German bonds tad higher ahead of July industrial production, European Central Bank policy decision”

While ECB officials have been very careful about expressing their concerns over the currency's rise this year, as the euro still remains broadly below levels obtaining when policymakers launched their monetary stimulus plans, there are some markets fears that that may change.

Sounds like the flawless time to announce the end of quantitative easing when the European Central Bank meets for its highly anticipated meeting on Thursday, right? But there's just one problem: the euro EURUSD, +0.1009% and its nearly 15% rally this year to a more than two-year high against the dollar.

The ECB is "stuck in the euro trap", he said.

That rise has come at a time when expectations of the European Central Bank announcing a timeline for a withdrawal of its bond purchase plans have reduced sharply in three weeks to less than a fifth from over half of the total number of analysts in Reuters polls.

"Strength in the currency will have downward pressure on the ECB's inflation forecasts through to 2019, which should prevent any hawkish tone this week", said Patrick O'Donnell, an investment manager at Aberdeen Asset Management. But the ECB's target is inflation, not growth, and it is far from certain it will meet its goal over coming years.

Few people expect the central bank to end the bond buying program altogether at the end of the year, but the question is how long it'll be extended for and when the tapering will begin. Readings for France and the Netherlands were at their highest for six years, and even the laggard economies of Italy and Greece hit a six and nine year high respectively, illustrating the broad-based nature of the recovery.

Japan's 10-year government bond yield fell to a 10-month low at minus 0.010 percent, while gold, another safe-haven asset, rose to 10-month highs.

A stronger exchange rate is bad news for exporters as it means their products become more expensive for other currency holders, potentially leading to slower sales and thus slower economic growth.

The U.S. dollar index, which measures the greenback's strength against a trade-weighted basket of six major currencies, dropped 0.25% to 92.59.

In most economies, and under normal circumstances, that would be good news, as domestic currency gains would signal overall confidence in GDP growth and the anticipation of modestly higher interest rates. And to buy eurozone stocks, you need to buy euros first.

Asian stocks are trading mixed after the White House said that "all options to address the North Korean threat are on the table".

The overall reaction in euro zone bond markets was muted, however, with strategists citing a reluctance to pile in heavily into bonds ahead of Thursday's European Central Bank meeting and adding that a pick-up in bond supply this week limited falls in bond yields.



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