Euro hits two-year high as City awaits UK public finances – business live | Business

Analysts at French bank BNP Paribas fear that the strong euro will hit exports, as well as keeping a lid on inflation:

Newsflash: Eurozone economists have cut their forecasts for inflation in the currency bloc, and hiked their growth forecasts.

That’s according to the latest ECB survey of professional forecasters, which highlight why Mario Draghi was so cautious yesterday.

Economists now expect inflation to average 1.5% this year, just 1.4% in 2018, and 1.6% in 2019 — all down 1.5% compared with April’s survey.

Low inflation is good for the shoppers, of course, but it means the ECB is still struggling to hit its target of getting inflation back to almost 2%.

On a positive note, the forecasts have also raised their forecasts for growth over the next few years:

Every British sports fan knows that you underestimate an Australian at your peril.

And overnight, a top Australian central banker launched a Steve Waugh-style counterattack against speculation that an interest rate rise is imminent.

Guy Debelle, deputy governor at the Reserve Bank of Australia (RBA), argued convincingly that his central bank wouldn’t be forced to follow Canada’s central bank, which hiked rates last week.

Debelle said:

“Just as the policy rate in Australia did not need to decline to the very low levels seen in other parts of the world, the fact that other central banks increase their policy rates does not automatically mean that the policy rate here needs to increase.”

This dovish talk sent the Australian dollar sliding, making it the worse-performing major currency today.

Adam Cole of RBC Capital Markets argues that the euro’s rally is misplaced.

There is really nothing in Draghi’s remarks yesterday that calls for this kind of bullishness on the euro and markets may end up getting disappointed before long.

European stock markets have dipped into the red in early trading, on fears that the stronger euro will hurt exporters.

In Germany, shares in BMW, Volkswagen and Continental are all down around 0.75%.

Yogi Dewan, CEO of Hassium Asset Management says the stronger euro could hit profits:

“It added to jitters about whether we’ll get the earnings growth that everyone is hoping for.”

Curiously, eurozone government bonds have actually strengthened this morning, pushing down the interest rates (or yield) on the debt.

You might expect them to have moved the other way, if the European Central Bank was really poised to trim its bond-purchase stimulus programme [which has been pushing prices up].

Chris Whittall of the WSJ agrees that it’s hard to square this with the euro’s rally:

The chatter in the City today is that the euro could hit $1.20 against the US dollar soon, for the first time since January 2015.

Bob Parker, investment committee member at Quilvest Investment Management, told CNBC that he expects the European Central Bank to trim its bond-purchase programme this autumn, and end it next year.

That would drive the euro higher.

Parker says:

Investors believe that the ECB QE programme will go to €40bn per month during the fourth quarter of 2017 [from €60bn today] and that the negative deposit rates will go.

This has been my view for the last three months and I assume that QE will end in 2Q18 [the second quarter of 2018].”

There’s no holding the euro back this morning!

The single currency has romped to a fresh two-year high in early trading, as traders anticipate that the European Central Bank will cut its stimulus programme in the next few months.

The euro has jumped to $1.1677 against the US dollar, its strongest position since August 2015.

The euro has also hit an eight-month high against the pound, at 89.77p, making foreign holidays more expensive for Brits.

Yesterday, ECB chief Mario Draghi said his governing council would discuss its bond-purchase scheme in the autumn. That opened up the possibility that it could decide to trim the pace of the programme at September’s meeting.

The ECB is planning to buy €60bn of debt each month with newly created money, up until December 2017. It also voted yesterday to keep interest rates at record lows.

Draghi did insist that the ECB would remain in the market for a long time, pointing out that inflation in the euro area is stubbornly below target.

But that hasn’t stopped the euro surging higher. And Peter Kinsella of Commonwealth Bank of Australia thinks it has further to go.

He told clients:

“It’s an armour-plated rally and it won’t stop.”

“Everything speaks in favour of further euro appreciation — increasing portfolio inflows, changing monetary policy, improved political risks.”

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

The main event today is Britain’s public finances for June.

With consumer spending subdued, and businesses fretting about Brexit, these figures will show how much the UK borrowed to balance the books last month. They should also indicate whether the UK is on track to hit its deficit targets this year.

City economists predict that the public sector net borrowing requirement (excluding the impact of state-owned banks) fell to £4.7bn last month, down from £6.7bn in May.

Last night, consultancy firm Fathom warned that the risks of a UK recession in the next year are now over 50%, so weak public finances might indicate that firms are struggling.

Alternatively, a strong reading would reassure investors.

Last week, the independent Office for Budget Responsibility warned that Britain’s public finances are vulnerable to shocks, as a recession is inevitable sooner or later….

We’re also getting a new inflation report from Canada, and a fresh count of how many oil rigs are pumping away in the US.

The agenda:

• 9.00am BST: ECB publishes survey of professional forecasters
  
• 9.30am BST: UK public finances for June
  
• 1:30pm BST: Canada inflation rate for June
  
• 6pm BST: US Baker Hughes weekly oil rig count