Euro recovers as inflation eases pressure on ECB

Wed Apr 30, 2014 6:56am EDT
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By Marc Jones

LONDON (Reuters) - The euro recovered and the currency bloc's government bonds retreated on Wednesday after euro zone inflation stayed just about strong enough to suggest the European Central Bank will take no action when it meets next week.

Euro zone inflation nudged up to 0.7 percent in April preliminary figures showed, and though it remained well below the ECB's target rate of just below 2 percent the figure is likely to come as a relief to the bank after a weak reading out of Germany on Tuesday.

With investors also awaiting the outcome of a U.S. Federal Reserve meeting and further developments in Ukraine, a cautious market mood kept the euro under pressure in the run-up to the data.

Its release lifted the shared currency to a session high of $1.3824 as market chatter of a rate cut or alternative easing measures faded.

ECB head Mario Draghi said last week that if the inflation outlook were to deteriorate, the ECB could respond with a "broad-based asset purchase program", probably quantitative easing - effectively printing money to buy assets.

On Monday, however, he told lawmakers from Germany's ruling coalition that while low inflation would persist in the euro zone, he did not expect deflation, according to a source who attended the meeting.

"The two important data for the ECB, inflation today and M3 (money supply) yesterday came in on the weak side which means the ECB is really under pressure, the problem is they have been under pressure for a while," said Philippe Gudin de Vallerin head of euro research for Barclays.

"They are definitely not complying with their mandate... The key is the euro, they really need to weaken the euro but it is not easy."   Continued...

A man looks at an electronic board displaying Japan's Nikkei average (top C) and various countries' stock indices, as passers-by walk past outside a brokerage in Tokyo April 16, 2014. REUTERS/Toru Hanai