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Waiting for Draghi – stocks rise and euro slips from highs

One down, one to go. Already today, the Bank of Japan has put back its inflation target (yes, again), knocking the yen, while the euro is slipping ahead of the European Central Bank’s rate call later in the session.

Sentiment is likely to be defined by how Mario Draghi, the president of the ECB, prepares the market for the prospect of reducing stimulus, currently running at €60bn of bond purchases a month. The words he chooses to define the outlook for tapering will be closely watched.

Paul Brain, head of fixed income at Newton Investment Management, says:

The euro is on track to reach $1.25 by the end of the year, but it won’t be a straight line and today could be a good reason to take some profits on recent moves against the dollar.

For currencies the interest rate story is most important as changing interest rate differentials drive currencies. If the ECB’s tone switches from reducing stimulus spending to discount rate increases then the euro could accelerate. But that’s probably for the ECB and Fed September meetings.

The euro is steady at $1.151 and European equities are rising, with the Euro Stoxx 600 up 0.4 per cent, ahead of the European Central Bank’s July rate call at 12.45pm London time.

It leaves the shared currency within reach of the $1.1583 high it hit earlier in the week, which took it back to levels last touched in May 2016. The dollar is bouncing back from its wider, 10-month lows, with the index tracking the greenback up 0.3 per cent at 95.0.

Germany’s benchmark sovereign debt yield is up 1 basis point at 0.546 per cent in the run-up to the ECB, up from 0.237 per cent in late June before the talk of tapering set the pace in capital markets. Mr Draghi’s address to the ECB’s June forum was seen as preparing the ground for the beginning of the end of stimulus spending. Yields rise when prices fall.

National European equities benchmarks are higher, with the Xetra Dax 30 up 0.8 per cent. German industrial stocks are setting the pace, with exporters also bouncing back from selling earlier in the week which tracked the strengthening euro.

The FTSE 100 is up 0.4 per cent, with consumer stocks and financials in the lead.

The rally in the technology sector is continuing, but at a gentler pace. The Euro Stoxx technology index is up 0.2 per cent after US tech stocks passed their dotcom era peak on Wednesday. General US indices also set record closing highs overnight, supporting the wider mood.

The Bank of Japan pushed back the target date for reaching its inflation goal by a year to 2019 as it left monetary policy on hold. The yen slipped 0.2 per cent to ¥112.14 per dollar mark afterwards.

With its decision to hold rates widely anticipated, the deferral of the target came with the central bank noting Japan’s consumer price index had been “relatively weak” when excluding the effects of energy prices. It was enough to knock Japan’s currency off its recent three-week dollar highs.

Tokyo’s Topix is 0.7 per cent stronger, helped by gains for tech stocks.

In Hong Kong, the Hang Seng index is up 0.3 per cent, while the Shanghai Composite is also 0.3 per cent higher.

A late rally for oil prices during the previous session is losing steam. Brent crude, the global benchmark, is hovering below the $50 dollar mark, down 0.2 per cent at $49.62. US marker West Texas Intermediate is down 0.1 per cent at $47.09.