Market wrap: euro tumbled after a dovish ECB statement - Westpac

Analysts at Westpac explained that the euro tumbled after a dovish ECB statement which announced an end to bond purchases by Dec 2018 but also said no rate hikes before mid-2019. 

Key Quotes:

"European bond yields fell sharply and European equities jumped."

"The US dollar rose against all G10 currencies, with AUD/USD down 0.8c to 0.7485."

Today we see the Bank of Japan decision and second tier US data, while several Asian markets are closed."

"The ECB surprised by delivering details of its policy guidance earlier than expected (their July meeting was the market’s consensus). The ceasing of its Asset Purchasing Programme into end 2018 was not that surprising, but the clear persistence of its current negative rate stance “at least through summer 2019” and the continuation of reinvesting maturing bonds for an extended period underscored a decidedly dovish slant."

"President Draghi gave a measured but notably cautious (dovish) perspective to the continued softening of Eurozone data and rising uncertainties, despite apparent confidence in reaching their inflation goal. The lowering of ECB staff’s 2018 GDP forecast (from +2.4% to +2.1%) highlighted the risks to Eurozone growth."

"EUR/USD was around 1.1650-1.1700 early this month when ECB officials started to talk about reviewing bond purchases at the June meeting. The euro rallied in anticipation of tighter policy, reaching as high as 1.1851 as the initial ECB statement was released. The details soon became clear though, sparking a steep fall which extended through the press conference and in New York trade to below 1.1580."

"The ECB’s contrast with a hawkish Fed reiterated the yield support of the US dollar, helping it gain against a range of currencies. USD/JPY rose from 109.90 to above 110.60. AUD was a little weaker than most, falling from 0.7560 in the London morning to below 0.7480. NZD/USD fell from 0.7040 to 0.6975. AUD/NZD extended a multi-week decline, -0.6% over the day to a low of 1.0705."

"The US dollar was also helped by strong May retail sales data, with total sales up 0.8%mth (f/c 0.4%) and strength in core measures plus upward revisions. Q2 GDP is shaping up very well."

"UK May retail sales surprised on the upside with a sound gain of 1.3%m/m (forecast +0.3%). The ONS cited improved weather and the royal wedding as materially lifting activity (notably in food and drink). GBP/USD rose 35 pips to 1.3445 on the data, an ill-fated rally ahead of the ECB decision, after which it followed the trend to slide to 1.3265."

"German 10yr government bond yields fell sharply after the ECB statement, from 0.50% to 0.42%. French bond yield fell 8bp, Italy -6bp. There was limited impact on US interest rates, the US 10yr treasury yield ranging sideways between 2.93% and 2.96%, while 2yr yields rose slightly from 2.55% to 2.57%."

"Fed fund futures yields were steady, continuing to price 1 ½ more hikes in 2018. US equities were little changed, with one eye on an expected decision by President Trump on tariffs on Chinese goods."