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Euro Slips as ECB Halves QE But Keeps it Open Ended; Dollar Firms on Reports Yellen is Out of Fed Race

The euro reversed lower from a near one-week high after the ECB pledged to maintain easy monetary policy even as it announced a reduction in its monthly asset purchases. The single currency slipped back below $1.18, while the US dollar was once again eyeing the 114 yen level amid reports that incumbent Fed chief Janet Yellen was out of the race to lead the central bank.

The European Central Bank announced it is extending its asset purchase program (APP) for a further nine months until September 2018, at a reduced pace of €30 billion from €60 billion per month, when the current one expires in December. The announced size and duration of the extended program was one of the scenarios being anticipated by the markets. However, the ECB took a much more dovish tone than expected by pledging to extend the APP beyond nine months if necessary, keeping it in effect open ended, as well as updating its forward guidance on reinvestments. The central bank said in its statement it will reinvest the proceeds from maturing bonds "for an extended period of time after the end of its net asset purchases". It also maintained its guidance to keep interest rates at present levels for "well past the horizon of the net asset purchases".

The euro dropped sharply immediately after the announcement, hitting a low of $1.1705 soon after ECB President Mario Draghi’s press conference ended. The euro’s losses deepened after Draghi said the majority of Governing Council members preferred to keep the APP open ended and refused to label the move as tapering, saying "This is not tapering. It’s just a down-size.".

The single currency was mixed against other currencies. It fell 0.8% against the yen at 133.31, having earlier hit a 2-year peak of 134.48 yen. It was also weaker versus the Swiss franc, coming off a fresh 33-month high of 1.1710 francs to around 1.1655. Against sterling, the euro was marginally lower at 0.8893 pounds, but managed to post gains against the Swedish krona and the Norwegian krone.

The Nordic currencies lost ground to the euro after the Norges Bank and the Riksbank kept their policies unchanged earlier in the day, allowing for a divergence in policy after the ECB’s tightening. The euro was 0.4% firmer against the Swedish currency at 9.7430 kronor and 0.5% firmer versus the Norwegian krone at 9.512.

The pound gave up more than half of yesterday’s impressive gains following the stronger-than-expected UK GDP figures. It came under pressure after survey data from the CBI showed a surprise plunge in British retail sales in October. The CBI’s index measuring the balance of retail sales volume fell to -36 from +42 in September and compares with an expected figure of +15. Sterling was trading 0.7% lower versus the dollar in late European session at $1.3170.

In other currencies, the Australian and New Zealand dollars maintained their downtrend. The aussie hit a fresh 3-month low of $0.7675 at the start of the session but was later attempting to reclaim the $0.77 handle. The kiwi had no respite either as it ploughed to a 5-month low of $0.6843. The Canadian dollar was also weaker, weighed by yesterday’s less hawkish statement by the Bank of Canada after it kept rates on hold. Dollar/loonie was on track for a sixth straight day of gains, hitting a three-month high of C$1.2826.

The greenback meanwhile was having a better day, helped in part by reports by Politico suggesting that President Trump was no longer considering reappointing Janet Yellen as Fed Chair when her term expires in February 2018, making Fed Governor Jerome Powell and Stanford University economist John Taylor as the remaining frontrunners. The prospect of a more hawkish policymaker heading the Fed has been one of the factors driving the dollar in recent days. The fresh speculation lifted the greenback from an intra-day low 113.33 yen to around 113.85, though this was below yesterday’s three-month high of 114.24 yen.

Also supporting the dollar today were better-than-expected weekly jobless claims. Initial claims for unemployment benefits in the US rose to 233k in the week of October 16 from a revised 223k in the prior week, but this was better than forecasts of 235k. Pending home sales disappointed however, as they were unchanged in September, missing expectations of a 0.2% rise.

The focus now moves to the budget resolution vote in the House of Representatives later today, which if approved, would be another step forward for the passing of Trump’s tax reform plans, while tomorrow’s preliminary estimates of Q3 GDP will be watched closely ahead of next week’s FOMC meeting.

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