Euro Declines On Anticipation Of New Stimulus From ECB

Euro Declines On Anticipation Of New Stimulus From ECB
July 24, 2019

 

The euro fell to $1.1170 yesterday as the greenback strengthened on safe asset demand due to soaring tensions in West Asia. Investors and speculators also have a bearish view of the euro on expectations of a new stimulus package from the European Central Bank (ECB). The greenback was also boosted by the agreement reached between the US President Donald Trump and members of the US Congress to extend the debt limit by two years, eliminating worries of a government failure to pay debt later this year. From a high of 1.1215, the EUR/USD pair declined to a low of 1.1144 in the past 24 hours.

The EUR/USD pair has been range-bound for the past few weeks as anticipations for a rate cut by both the US Fed and the ECB was negating the impact on the greenback and the euro.

The dovish statement issued by the New York Fed President John Williams resulted in an increase in the pricing for a 50-base-point rate cut last week. After a Fed spokesperson explained that the comments did not relate to “prospective policy initiatives,” the 50-basis points rate cut hopes subsequently diminished.

Priced-in projections for a 50-basis point rate cut have declined from a high of 71% last week to 18.5% yesterday. The US Fed and the Bank of Japan are holding a monetary policy meeting next week. The greenback also strengthened due to the conflict in the Strait of Hormuz, the main waterway for oil trade. Media footage showed the Iranian Revolutionary Guards seizing an oil tanker while daring a British warship.

The EUR/USD pair’s decline was also aided by anticipations of new stimulus program from the ECB. Marion Amiot and Sylvain Broyer, economists at S&P, anticipate the ECB to slash its deposit rate by a minimum of 10 basis points during the September policy meeting and possibly restart quantitative easing (QE) with €15 billion ($16.85 billion) worth asset purchases in October. The analysts do not anticipate the central bank to hike interest rates until Q2, 2021. While money markets have reduced odds on the ECB’s 10-point deposit rate cut to less than 40% from around 60% last Friday, analysts anticipate the ECB to issue dovish outlook and perhaps more favorable conditions for their scheduled fresh medium-term loans.

Neil Mellor, a senior currency strategist at BNY Mellon in London, expects the euro volatility to increase in the coming days. Mellor said, “Historically, the ECB has been far more effective at queuing up policy stimulus than delivering it, but there is no taking away the fact that we are in for some volatility ahead on the euro.”

In the meantime, US President Donald Trump and US Congress leaders reached an agreement to extend the debt limit by two years and also the caps on federal expenditures. The deal would prevent a government default but certainly, increase budget deficits. Under the agreement, expenses on non-mandatory schemes would increase to $1.37 trillion in the fiscal year beginning October 1st, from $1.32 trillion in the present fiscal year.

In fiscal 2021, spending would rise at a slower pace, to $1.375 trillion.

Following the debt agreement, Trump tweeted as follows: “I am pleased to announce that a deal has been struck with Senate Majority Leader Mitch McConnell, Senate Minority Leader Chuck Schumer, Speaker of the House Nancy Pelosi, and House Minority Leader Kevin McCarthy.”

Marshall Gittler, chief strategist at ACLS Global, explained why the agreement strengthens the greenback against its peers: “This takes the threat of yet another debt-ceiling drama off the table for two years, by which time many of us fervently hope that a set of rational politicians will have taken office and this whole pointless recurring drama will be done away with.”

Positioning data released last week indicated that investors continue to have a net long position in the US dollars. Demand for safe-haven asset, ECB stimulus expectation, and debt agreement is anticipated to keep the greenback bullish in the short-term.

Technically, the EUR/USD pair has started declining after facing resistance at 1.1280. The next major support is anticipated at 1.0900 levels. The stochastic oscillator is also making new lows. As a result, we can expect the currency pair to remain bearish in the short-term.

EUR - techncial analysis - 24th July 2019

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

 

Ian Maguire

Ian Maguire

Ian is our resident contributor to the latest going ons in the cryptomarket, keeping up to date with the latest icos and coins


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