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Business / Finance

When the battle comes "heavy artillery", the Euro is left with no choice but to go to reduce

RSS feed for Forex Review 16.08.2019 at 10:06

Daily analytical reviews of the Forex market

The single European currency fell sharply Thursday, reaching a new low in two years.

on the Eve of the Euro against the US dollar dipped by almost 0.5%. Sales of the single European currency provoked statements by the member of the ECB governing Council Olli Rehn. According to him, at the next meeting of the European regulator will announce the stimulus package, including significant and sufficient bond purchases and lower interest rates. These measures can outperform investors ' expectations.

"When you're dealing with financial markets is always better to exceed expectations than not meet them, and it is better to take a stronger package than to make some modest steps," said a senior official of the ECB.

He pointed out several risks to the European economy, including the unstable political situation in Italy, the economic slowdown in China, uncertainty in the global economy, tensions in trade relations between the US and China, the possibility of "hard" Brexit.

"In the last two months have seen some deterioration in economic prospects in Europe. This deteriorating economic backdrop justifies the adoption of further measures in monetary policy, what we intend to do in September. I think the majority in the ECB governing Council is likely to prefer aggressive package of incentives," – said O. Ren.

the Purpose of such rhetoric is clear: to make the Euro cheaper and give the opportunity to accelerate inflation in the Eurozone.

is not the first year experts are predicting the Euro to fall to parity with the U.S. dollar.

will the EUR/USD to update local minima? From a fundamental point of view, the Euro is weaker than the grinbek. The technical picture shows that the downside potential EUR/USD is really high. However, ahead of September is the month when from words to deeds can go as the fed and the ECB.

According to a survey conducted recently by Bloomberg, the vast majority of economists expect that in September the European regulator lowered its Deposit rate even deeper into negative territory (from -0.4% to -0,5%) and will announce the launch of a new program to issue money through asset purchases.

the volume of a new round of quantitative easing (by the way, the third in the last nine years) remain a matter of dispute.

So, the specialists of ABN Amro believe that asset purchases will amount to €70 billion per month and will be implemented within nine months. Morgan Stanley also predicts QE at €45-60 billion a month for at least one year. According to calculations of Goldman Sachs, the ECB will "print" a total of up to €300 billion.

Some analysts believe that the purchase of bonds will be announced simultaneously with a reduction in rates, while others predict a launch QE with a delay. In particular, UBS does not consider new asset purchase a done deal.

the September meeting of the European regulator will be the last for Mario Draghi as President of the Central Bank. Finally, he can still decide to impress investors. However, given the fact that interest rates in the Eurozone already in negative territory, to surprise market participants can only start a massive new program of QE. This step will certainly have a negative impact on the single European currency.

At the July meeting of the officials of the FOMC did not have a serious reason for additional easing of monetary policy, however, the sale of the American stock market and the deterioration of trade relations between the US and China has led to the fact that investors expect from the fed for at least two more round of interest rate cuts in the current year. According to some experts, now Bank of America left with no choice but to follow those expectations.

Why, then, grows grinbek? The reasons for the strengthening of the American currency, apparently, lies in the power of the United States. When the global economy led by Germany and China moving towards a recession, the U.S. economy stand on its feet confidently, what to buy, not the dollar?

Released yesterday data on retail sales in the U.S. in July exceeded forecasts that eased investor concerns that the economy goes into recession, and has supported the American currency.

"When the rest of the world is sliding into the abyss, the July figures for retail sales show that the American consumer to the rescue again," said Michael Pearce at Capital Economics.

Recall on Wednesday for the first time since 2008, the yield on 10-year treasuries were below the yield of 2-year bonds. This phenomenon is known under the term "inversion curve" and is considered an indicator of impending recession in the United States. The current inversion has caused panic in financial markets and fueled speculation that the Federal Reserve will have to cut interest rates before the next meeting, which will take place on 18 September to stay ahead of growing concern.

"Any inversion that could give a bearish signal the U.S. economy needs to be sustainable for a certain period, so we'll have to wait and see on this" – said yesterday the FOMC member and President of the Federal reserve Bank of St. Louis, James Bullard, saying that the turmoil in financial markets and slowing global economy does not require fed action prior to scheduled meetings of the Central Bank on September 18.

According to strategists at Goldman Sachs, the status of the safe-haven currency could become a major obstacle to the weakening of the dollar in the medium term if Bank of America will reduce interest rates beyond what the market is now waiting and has already placed in quotations.

"History shows that the dollar could break out of their typical feedback with global growth. As a rule, this occurs only when the fed strongly enough narrows the interest rate differential between the US and its major trading partners", – said the representatives of the financial institution.

Economists at Goldman Sachs expect the fed to cut interest rates by 0.5% against the forecasted futures market 1%.

"the Further dynamics of the dollar will depend on the comparison of economic growth and the prospects for monetary policy in the US and rest of the world. We should get more clarity on both factors in the following month or within two," said they.

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