No basis for hawkish turn as European Central Bank holds firm

At the time of writing the EUR GBP exchange rate was trending around 0.87 and the GBP EUR exchange rate was trending around 1.14.

Draghi also revealed the European Central Bank would continue with QE at a rate of £60bn until the end of December "or beyond, if necessary".

The initial catalyst for a rise in the exchange rate came from Thursday's European Central Bank meeting as Draghi communicated less urgency for further policy action.

Its current quantitative easing programme is set at €80 billion per month and is scheduled to be extended until December, but at a decreased rate of €60 billion.

Earlier, Draghi said the European Central Bank had revised its 2017 inflation forecast up to 1.7 percent from the 1.3 percent it saw in December.

He suggested that the bank "now take its foot off the gas and scale back its bond purchases by 10 billion euros ($10.6 billion) a month as of April".

The ECB has generally been extremely cautious to exit its monetary stimulus program too quickly, afraid of nipping in the bud a still fragile economic recovery across the single-currency area.

Draghi sounded slightly more hawkish than expected and that the "ECB is expected to reveal a tapering plan in September, if the eurozone's political picture is stable and the inflation is on a solid path toward the bank's 2% mandate target", said Ipek Ozkardeskaya, senior market analyst, at London Capital Group.

The key takeaway from the ECB's adjustment to its forward guidance is that the lows of eurozone market rates are past, she said, with the market reaction underlining just how dominant the central bank's role on market positioning, "from euro shorts to fixed-income longs, under a lower-for-longer rates consensus view after the best part of half a decade". I think it's more likely that he'll refrain from letting much go at this early stage but highlight the improvement in the data and possible reduction in downside risks.

The ECB, however, may maintain rates because the increase was be driven by oil and unprocessed food prices.

The Eurozone base interest rate, namely the interest rate on main refinancing operations, will remain at 0.00 percent, with the marginal lending rate and deposit rate remaining at 0.25 percent and minus 0.40 percent respectively. The company reported profit before tax of 325 million pounds for the year ended 29 January 2017, compared to 217 million pounds, previous year. Mr. Draghi will have a tough job of communicating to the market that while there is evidence of a recovery, it would be premature to reduce the size of the stimulus program.

"I have no idea whether the reports are correct or not but it shows where we are", said Axel Merk, president and portfolio manager at Merk Hard Currency Fund in Palo Alto, California.

"The ECB will wait to see the political risks out of the way and convincing signs that underlying inflation is on an upward trajectory before tightening", said ING strategist Martin van Vliet.

With the closely watched monthly jobs report looming, the Labor Department released a report on Thursday showing a rebound in first-time claims for US unemployment benefits in the week ended March 4th.

  • Zachary Reyes