ECB: low-interest rate policy for years to come

23.07.2021 12:34|Forex

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Low-interest rates in the Eurozone may continue for years, and it seems that bond yields may not increase quickly as the pace of asset purchases could be accelerated - these are the main conclusions after yesterday's decisions and the press conference of the head of the European Central Bank.

What could this mean for financial markets? Access to very cheap financing, cheap loans, low-interest rates on debt, and negative real interest rates, which could still push cash into risky assets.

Thus, it seems that European equities could still be a direction for capital flows. This is in fact confirmed by the data. This week, the German DAX is up for the fourth session in a row, erasing Monday's correction that brought the index down from the 34,700 level to 33,700 points.

Signs of a prolonged period of stimulus from the European Central Bank and good PMI data seem to be improving sentiment and steering the German index toward an all-time record. The European Central Bank changed its guidance on Thursday, pledging to keep interest rates at record lows as long as inflation permanently hits its 2 percent target. The ECB is also maintaining the pace of its asset purchase program at 20 billion euros per month.

A set of encouraging data

According to a report by IHS Markit, the Eurozone Composite PMI rose to 60.6 in July 2021 from 59.5 the previous month, above market forecasts of 60. The latest reading indicated the strongest increase in private sector activity since July 2000. Service sector output rose the most in 15 years, while industrial production weakened due to a deteriorating supply situation, but remained strong overall.

Growth in new orders as measured by both manufacturing and services accelerated to the fastest level since May 2000. As for prices, production costs rose at a near-record pace, while selling price inflation eased from the highest level recorded in June. Business confidence may have suffered due to rising concerns over the delta variant of the coronavirus, causing sentiment for next year to fall to a five-month low, according to a report from IHS Markit.

What does ECB policy mean for the euro exchange rate?

Yesterday's ECB statement may not be good for the Euro. The announcement of no interest rate changes could cause the single currency to weaken, which is likely to be seen now in the EUR/USD exchange rate, which remains close to weekly lows in the region of 1.1750. If the Federal Reserve does not back away from interest rate hikes in 2023 in the near future, the divergence in the actions of the world's two most important central banks could widen. As a result, the euro could systematically lose value against the dollar. It is even possible that it could erase all gains since March 2020.

Daniel Kostecki, Chief Analyst Conotoxia Ltd.

Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.

77.31% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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