LONDON (Reuters) -Europe’s single currency and government bond yields across the region fell on Thursday after the European Central Bank signalled a steady reduction of stimulus over the coming months but refrained from switching to a more hawkish stance.
Bond yields have marched higher in recent weeks as investors bet the ECB will hike rates sooner rather than later to curb inflation which, at 7.5%, is well above its 2% target.
But the ECB concluded its latest meeting with cautious steps to unwind support and avoided a hard schedule. It confirmed the direction of travel with few specifics beyond the coming months.
Markets reacted by selling the euro and hoovering up government bonds.
The euro turned negative against the dollar, slipping 0.16% at $1.0869. It had traded a touch firmer ahead of the ECB decision at $1.0918. Against sterling it eased 0.14% to trade at a five-week low.
“The knee jerk pullback in the euro/dollar suggests some were positioned for something more hawkish from the ECB,” Societe Generale currency strategist Kenneth Broux, said.
Euro zone government borrowing costs fell sharply, with two-year German bond yields down almost 4 basis points on the day at 0.033%, versus 0.09% just before the ECB statement.
Germany’s 10-year bond yield, which earlier this week hit its highest levels since 2015, slipped to around 0.77%
Italian yields were a touch lower, having traded sharply higher earlier in the day.
Money markets trimmed rate hike bets and now price around 60 bps worth of tightening by year-end, versus the earlier 70 bps.
Futures dated to the ECB’s July meeting now pricing around 14 bps worth of rates hikes, down from 20 bps earlier on Thursday.
Euro zone stocks held onto gains and were up 0.5%.
Most central banks have stepped up their fight against inflation. Canada and New Zealand this week raised rates by 50 bps, the biggest hikes in two decades for both, while South Korea and Singapore tightened policy earlier on Thursday.
The U.S. Federal Reserve is expected to deliver a 50 bps rate rise in May.
“Excitement ahead of today’s ECB meeting was high,” said ING’s global head of macro Carsten Brzeski but he added that “Europe is different and the ECB is different”.
“Instead of any panic reaction, the ECB continues with its very gradual normalisation, which in our view is bringing an end to net asset purchases over the summer and an end to the era of negative interest rates before the end of the year,” he added.
(Reporting by the London markets team, Writing by Dhara Ranasinghe; Editing by Sujata Rao)
