European Central Bank holds rates steady and reaffirms ultra-easy monetary policy

Central Bank Weekly US Dollar Breaks Year-long Downtrend as US Yields Jump

ECB keeps rates, policy and guidance unchanged

"A reiteration of the status quo constructive domestic economic outlook - with growth and inflation expected to broadly recover over the ECB's forecast horizon". "That can also be proved with our own currency indices which show that the downside correction of the exchange rate over the past few days was driven by a strong Dollar rather than a weaker Euro", says Thu Lang Nguyen, an analyst at Commerzbank.

The euro dropped to session lows after ECB President Mario Draghi hailed "solid" euro zone growth but kept rates unchanged, without a clear signal about ending the central bank's quantitative easing program.

Concerns about protectionist threats, geopolitical risks and global trade tension have added to doubts about the strength of the eurozone recovery.

They said a decision on future moves would likely be communicated in June or July, with September only an outside possibility as it was too close to the tentative end date of asset buys.

Indeed, with the euro zone economy expanding for 20 quarters in a row and millions of new jobs created, the main debate among policymakers is about how quickly to withdraw stimulus and preserve European Central Bank firepower for the next downturn.

The ECB governing council at its meeting today decided that the interest rate on the main refinancing operations, the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00 per cent, 0.25 per cent and (-) 0.40 per cent respectively.

Central Bank Weekly US Dollar Breaks Year-long Downtrend as US Yields Jump
ECB Takeaways: Few Concerns, No Changes

Business sentiment has already taken a hit, particularly in export-focused Germany, and a full-fledged trade war could quickly hurt growth - a risk already highlighted by policymakers at the ECB's March meeting. The recent jump in US bond yields has caused US-Japan and US-German yield differentials to widen further in the dollar's favour, leaving the yen and the euro lower.

With today's decision, the ECB's bond purchases, aimed at stimulating growth and inflation through rock-bottom debt costs, will continue at €30 billion a month at least until the end of September, or beyond if needed to prop up inflation.

Economists expect Friday's data to reveal United Kingdom economic growth slowed to between 0.2% and 0.3% in the first quarter, possibly providing the final nail in the coffin for hopes of a rate hike from the Bank of England (BoE) next month. Even if the single currency's rise has petered out for now, exporters like Continental AG and Volkswagen AG flagged the exchange rate as a risk. However Core inflation which is the important figure remains subdued at 1.1%, 0.9% below the European Central Banks 2% target.

Meanwhile, the euro added 0.1 percent to 1.2176 against the dollar, but was still not far from a near two-month decline of 1.2160 set on Wednesday.

Lower interest rates and QE are created to pump cash through the financial system and into lending to firms and households - powering economic growth and inflation.

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