European Central Bank keeps interest rates unchanged

Ann Santiago
January 28, 2018

S&P 500 e-minis were up 11.25 points, or 0.4 percent, with 177,432 contracts changing hands.

ECB President Mario Draghi is set to hold the customary post-decision press conference 8.30 am ET in Frankfurt.

Britain, undergoing its own tricky negotiations as it tries to untangle itself from the European Union, is facing the opposite problem to the currency bloc with a weaker sterling since the Brexit vote driving nflation well above the Bank of England's target of 2 percent.

A survey of German business confidence has matched its all-time high, providing more upbeat data ahead of the European Central Bank's policy meeting. The market will have a lot to trade on, but because Draghi speaks for an hour, there could be choppy market conditions as the market digests his every word.

If the bank's tone is perceived as hinting it will take a more hawkish tone in the coming months, the Euro could continue its climb against the US Dollar.

The ECB opted to keep interest rates unchanged and the value of their money-printing programme at €30BN per month - in line with analyst expectations. According to their last and previous meeting a year ago, they are looking to revisit the monetary policy somewhere around "early" 2018.

Still, Draghi noted that domestic price pressures remain muted overall and have yet to show convincing signs of a sustained upward trend.

"[Draghi's] job will be to make it perfectly clear, in no uncertain terms, that the ECB's asset purchases will continue at least through September, and longer if necessary, to achieve and sustain inflation metrics at or just above 2%", said Carl Weinberg, chief economist for High Frequency Economics.

"We can be hopeful that the October extension was the last one", European Central Bank executive board member Benoit Coeure told German business daily Handelsblatt in November.

Still, many market players expect the BOJ to wait several months, and possibly many more, before tightening its policy, given the country's inflation is nowhere near its two-percent target.

Mario Draghi says the euro region is firing on all cylinders, and he's not about to get in the way.

"Focus is Euro volatility generating uncertainty, but not voicing concern about the level of the Euro".

Council members in favour of a prolonged, gentle exit from bond-buying are fighting a rearguard action against more aggressive "hawks", as the bank approaches technical limits to bond-buying that could open it to legal challenge. The Brexit risk premium on the pound seems to have declined substantially, and although that may be a little premature considering the absence of major developments in the negotiations, momentum is clearly in favor of the GBP at the moment.

The euro is at a three-year high against the dollar.

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