The latest from the European Central Bank (ECB) shows the European economy still in need of crutches. They have lowered their growth and inflation forecast for the eurozone at a meeting that they had last night.
The exchange rates were left unchanged and they have stated that if the economic environment were to get worse, they would not hesitate to increase their money printing programme not only now but all the way beyond September 2016. This means that the Euro dollar’s supply will continue to increase and will lead to the devaluation of the Euro currency.
Not so good for the EURUSD bulls but a nice situation for the EURUSD bears as we saw the EURUSD reach lows of 1.1086 before reviving from those lows as traders and investors position themselves for the next mother of all data, the Non farm payrolls report.
The pair is expected to be range bound today as the market awaits the NFP data and also considering that the Chinese market is closed today due to holidays and would not be opened till next Monday.
Also, the ECB have increased the limits of their sovereign bond ownership to 33% from 25%. This allows the ECB much more flexibility on carrying out its duties.
Growth forecasts have also been lowered with GDP growth set at 1.4% this year versus previous number of 1.5%. Next year’s growth has also been cut from 1.9% to 1.7% while GDP growth in 2017 went lower to 1.8% from 2.0%.
Inflation forecast have also been tone down and the CPI figures once set at 0.3% in June have now been set at 0.1%. The forecast for 2016 was reduced from 1.5% to 1.1% and the 2017 numbers was also cut to 1.7% from 2.0%. The reduction in forecast figures show the lack of confidence of the ECB in where the Euro zone economy is going over the next few years and they are taking the necessary measures to ensure that the Euro zone will survive any potential risks to their economy.
“Economic growth in the euro area is likely to continue to be dampened by the necessary balance sheet adjustments in a number of sectors, and the asset purchase programme continues to process smoothly. These purchases have a favourable impact on the cost and availability of credit for firms and households,” said ECB boss Mario Draghi.
Apparently what is happening in China is affecting the monetary policy of the Euro zone as the banks have said and committed themselves to the possibility of buying more bunds in order to prop up the economy if China continues to stutter.
It is apparent that a strong Euro is not in the interest of the ECB and further quantitative easing will be on the cards as long as the volatility and unstable world economy doesn’t change for the better.
The flexibility in the way Draghi handles the quantitative easing programme is seen in how the ECB can increase its monthly purchases. On top of that they can still make changes to the policy rate in order to make the Euro zone more competitive.
So far Draghi’s speech have sent the core and peripheral euro area sovereign bonds rallying and Bund yields falling 6bps.
I believe that Draghi will more likely continue its QE programme than change the policy rates. The scaling up or extension of the QE programme now looks more likely than ever.
The latest from the Euro Zone have sent the web abuzz with talk that this would cause the Fed and Yellen to rethink their plans to increase rates. With Europe taking a more defensive stance, the Fed increasing rates would make the US economy less competitive and expose the US economy to unnecessary risks.
Conclusion: I am bearish the EURUSD and will likely take a position only after the release of the NFP figures.
Cheers and to your trading victory!