On Tuesday’s Asian session, the euro initially extended early gains into the European morning, reaching a best level just above USD1.2470. By lunchtime, however, it had fallen almost a full cent from its earlier high after yet another weaker than expected piece of incoming economic data. By the end of the day, the EUR was up against the GBP and AUD, little changed against the NZD but lower against both the USD and CAD. Overnight in Asia, the euro has been stuck in a relatively tight range from 1.2400 to 1.2420 though it has slipped around two-tenths against a recovering GBP.
There’s a clear public split becoming visible on the ECB. Speaking at the Austrian Central Bank on Monday, Bundesbank President and ECB Council member Jens Weidmann had said, “The markets see a first rate hike around the middle of the year 2019, which is probably not entirely unrealistic. However, the end of net purchases is only the beginning of a multi-year process of monetary normalization. That's why it's so important to actually start soon…”. Yesterday morning, however, Governing Council member Erkki Liikanen said that exiting from unprecedented stimulus can be more safely done once expectations for inflation exceed policy makers’ goal. “A gradual tightening of monetary policy will rest on a more solid basis when indications of inflation rates to potentially temporarily exceed 2 percent become more prominent in inflation expectations,” the Finnish central bank governor said.
Away from monetary policy, ECB officials may face pressure from a wholly different source. After the UK exits the European Union, so the EU will face a shortfall in its funding. The EU Commission’s ruling college will today discuss ways to find new sources of revenue including proposals for a plastics tax and a €50 billion raid on European Central Bank profits. One of the measures under discussion is a plan to divert profits made by the euro zone’s 19 national central banks from printing banknotes straight into EU coffers. The commission estimates the revenue stream could generate €56 billion during the seven-year span of the next EU budget. More than 90 per cent of the so-called seigniorage profits are distributed by the ECB to the euro zone’s 19 central banks that often then pass a portion on to their national treasuries. ECB officials are said to believe the proposals from Brussels are a threat to their much-cherished independence. The EUR opens in London this morning at USD1.2410 with GBP/EUR in the mid-1.14’s.