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Euro sinks as ECB slashes growth forecasts and warns of the 'threat of protectionism'

Key Points
  • The euro zone's central bank slashed its growth forecast for 2019 to 1.1 percent from an earlier forecast of 1.7 percent made in December.
  • ECB President Mario Draghi said Thursday that there had been a "sizable moderation in economic expansion that will extend into the current year."
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ECB's Draghi: Near term growth weaker than expected

The euro fell sharply against the dollar Thursday after the European Central Bank (ECB) unveiled a series of market-friendly policies amid a slew of rising risks.

The euro zone's central bank slashed its growth forecast for 2019 to 1.1 percent from an earlier forecast of 1.7 percent made in December. ECB President Mario Draghi said Thursday that there had been a "sizable moderation in economic expansion that will extend into the current year."

"The persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets appears to be leaving marks on economic sentiment," Draghi told reporters.

Euro sinks

The euro, which had already been falling after an earlier rate announcement, dropped again after Draghi's remarks. At 2:00 p.m. London time, the single currency was down 0.5 percent against the dollar, trading at $1.1245.

The 19-member region has been overshadowed by political developments in Italy, which entered a technical recession at the end of 2018; and in the U.K., where its departure from the EU has yet to be finalized. There are also concerns about a potential slowdown in the Chinese economy, given its reliance on exports to the country. Recent manufacturing data have also indicated weaker activity, especially in Germany — the traditional growth engine of the region.

VIDEO3:0103:01
We're determined to act when necessary, ECB's Draghi says

"The impact of these factors is turning out to be somewhat longer-lasting, which suggests that the near-term growth outlook will be weaker than previously anticipated," Draghi also said Thursday.

Inflation forecasts cut

Given the worsening economic conditions, the ECB also lowered its inflation forecasts for 2019. Annual inflation is set to hit 1.2 percent this year. The December forecasts had pointed to a headline inflation target of 1.6 percent. The central bank is positive that its new set of measures will help bring inflation closer to its target of "close but below 2 percent."

The ECB's interest rates remain at record lows and are set to remain at these levels at least until the end of the year. The central bank also announced a fresh set of loans to euro area banks on Thursday, aimed at boosting the real economy.

The euro zone's central bank, for those nations that share the single currency, ended its massive bond-buying program back in December but is now unveiling yet more stimulus in the face of weakening growth and external risks.

VIDEO1:4401:44
Political decisions determine if Europe responds to policy: ECB's Draghi

Karen Ward, a chief market strategist for EMEA at J.P. Morgan Asset Management, said that the ECB had now followed the U.S. Federal Reserve with a "significant pivot" in policy.

"Whilst such an announcement was expected at some point in the coming years the market is welcoming this proactivity. The euro exchange rate is down alongside European government bond yields," she said.

"This should help stabilize sentiment and activity in the euro zone. But for a meaningful turnaround in Europe we look further afield to what's happening in Beijing. In our view a notable rebound in activity in China is required to see a significant reacceleration in Europe over the course of the year."