Trump tariffs cast dovish shadow over European Central Bank

EUR  USD Reversal Pattern on the Horizon? Is Volatility Underpriced

European Central Bank chief Mario Draghi raised concerns today about the state of worldwide relations after US President Donald Trump sparked fears of a trade war with his threat to impose punitive tariffs on steel and aluminium imports.

The ECB is expected to call time on buying new bonds under the QE programme by the end of this year, but it is also expected to maintain interest rates at record lows "well past the horizon of the net asset purchases".

After rising sharply at the start of the year to hit a three-year high of $1.2556 in February, the euro has been stuck in a range in recent weeks as the dollar alternately rose and sold off depending on global risk appetite.

Markets have this week nervously watched a populist surge in the eurozone's third-largest economy and barbs exchanged between Washington and Brussels over looming United States tariffs on steel and aluminum and possible European Union counter-measures. The ECB has said purchases will continue at 30 billion euros ($37 billion) monthly at least through September.

The move was not totally unexpected as over the past few months as a divide in Governing Council had surfaced with some policymakers seeking such a tweak to the forward guidance language. Pound/dollar was on a downtrend amid Brexit uncertainties, reaching 1.3856 (-0.32%).

The Bloomberg Dollar Spot Index increased 0.5 percent. Italian 10-year bond yields dropped below 2 percent to also hit a one-month low. "It depends who says what over night, and what is hitting Twitter", Paul Powers, head of USA and European sales trading at Raymond James, said by phone.

That soothed worries about the prospect of more aggressive trade measures after the departure of Trump's top economic adviser Gary Cohn. But he said such disputes should be worked out among trade partners, not decided by measures initiated from one side.




This news helped draw investor attentions away from the ongoing talk of trade wars and tariffs, reminding markets of the fact that the US Fed could be preparing for a rate hike this very month and putting EUR/USD exchange under renewed pressure. Turkish assets largely shrugged off Moody's cutting its credit rating deeper into junk-rated territory.

Along with historically low interest rates, the bond purchases aim to support economic growth in the Eurozone by pouring cash into the financial system, thus raising inflation to target 2%, which is perceived as favorable for long-term growth.

The Mexican peso last stood at 18.6900 per dollar, bouncing back from Wednesday's low of 18.90 while the Canadian dollar changed hands at $C1.2888 to the U.S. unit, off its eight-month low of $C1.3002 hit earlier this week.

The Footsie steadied in the previous session, adding 11.09 points to close 0.16 percent higher at 7,157.84.

Pizza delivery firm Domino's Pizza rose 2.6 per cent following a better-than-expected 10.2 per cent rise in its full year pretax profit.

The U.S. dollar held onto early morning gains, trading at 89.8 on the DXY index.

Key industrial metals were weak. Not likely to be on that list is China, which warned of a "justified and necessary response" in the event of a trade war.

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