Euro zone bond yields are steady as ECB worries about euro strength continue

Euro zone bond yields remained steady on Thursday as concerns remained about the strength of the euro and whether it could prompt the European Central Bank to cut interest rates, while the US Federal Reserve kept rates unchanged.

Germany’s 10-year yield was last seen little changed at 2.86%. Yields on short-dated euro zone bonds retreated on Wednesday, with German two-year yields sliding to their lowest levels in a week. It last stood at 2.07%.

The euro rose above $1.20 on Tuesday, strengthening against a weaker dollar in recent days. Although it is now trading below $1.20, the euro zone’s status as a net energy importer means that even small currency gains can lower the price of energy and other imported goods, which in turn can reduce inflation. ECB policymaker Martin Kocher told the Financial Times that further appreciation of the euro could force the central bank to cut rates. Market bets on an ECB rate cut by mid-year rose on Wednesday. The euro’s rise “tilts the balance of risks slightly more towards more European Central Bank cuts, but the impact on rates should be limited for now,” ING analysts said in a note. Elsewhere, the Fed kept interest rates unchanged on Wednesday as expected, saying inflation remained elevated and the labor market continued to stabilize. Fed Chairman Jerome Powell struck a somewhat hawkish tone in his post-meeting press conference, but said a rate hike was not part of policymakers’ baseline outlook.