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ECB ready to increase stimulus amid geopolitical tensions

Nothing Mario Draghi said yesterday (7 August) at the European Central Bank (ECB) meeting was particularly surprising, and his speech was more bearish for the euro. Draghi mentioned that the ECB is getting serious about ABS (asset-backed securities) purchases. Mr Draghi also stated that the ECB and US Federal Reserve monetary policies will diverge for a long time with rates moving in opposite directions.

The ECB also commented that the recovery is too tentative and very slow with unemployment stubbornly high. The bank is also worried about geopolitical tensions. Yesterday Russia banned food imports from the EU in reaction to the financial sanctions announced by the EU last month. While the exact implications are still unclear, Russia is nonetheless the world’s fifth largest food importer and it is likely to hit European farmers hard, since the continent has close agricultural trade links to Russia and the consequences could potentially push the Eurozone inflation even lower.
 
As expected, the Bank of England’s decision to leave monetary policy unchanged had very little impact on the pound. The market will eagerly await the release of the minutes on 20 August. There’s been a lot of talk about the division within the BoE, and some policymakers believe that rates should rise early to ensure that the process is smooth and gradual. Although the manufacturing sector is losing momentum and wage growth has been soft, the service sector is robust and house prices remain high. As a result, policymakers can argue that rates should rise soon in order to avoid being caught behind the curve and forced to deliver a larger rise in future that could threaten the recovery. Trade balance is scheduled for release today (8 August).
 
In the US, despite the ten-year Treasury yields hitting a one-year low, the dollar traded higher against most of the major currencies as the ongoing tensions in the Ukraine combined with weakening economic data abroad driving the demand for Treasuries. Investors are looking to US assets for safety and their demand for Treasuries has translated into demand for the dollar. On the data front, weekly jobless claims dropped below 300,000 for the second time in two months. With only 289,000 claims reported in the week ending 2 August, the four-week moving average of claims hit an eight-year low, a sign of further recovery in the labour market.


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