The European Central Bank (ECB) is scheduled to review its monetary policy today. There are no major expectations from this policy meeting after cutting interest rates further into the negative territory and re-launching the quantitative easing barely four months ago. Despite these measures, the eurozone economy continues to be in shambles. The meeting is still significant as the new chairwoman Christine Lagarde is revamping the ECB’s functions and operation. At the first meeting of the year, the ECB is likely to launch the ECB’s strategic review for the first time since 2003.
Eurozone CPI Image
Source: Bloomberg
Both Germany and eurozone manufacturing and services PMI continue to remain below 50 marks. Inflation remains subdued despite the recent uptick. Germany’s inflation remains at 1.5% while the ECB’s inflation stood at 1.3% in December. This is well below the ECB’s official inflation target of 2%. Germany’s factory orders, GDP, ZEWcurrent situation and eurozone consumer confidence, industrial production have declined sharply. Germany and eurozone trade surplus have narrowed sharply too due to hostile trade actions undertaken by the US President Donald Trump. Hence the eurozone economy remains subdued.
Recently, Trump has signed phase one of the trade deal between the US and China. The US Treasury Department has dropped its designation of China as a currency manipulator. As a result, China has pledged to buy almost $80 billion of additional manufactured goods from the US over the next two years as part of a trade war truce. However, US President Donald Trump has said his administration will start negotiating the phase two US and China trade agreement soon but that he might wait to complete any agreement until after November’s US presidential election. Trump has also threatened to impose high tariffs on imports of cars from the European Union if the bloc doesn’t agree to a trade deal. Treasury Secretary Steve Mnuchin has said that Italy and Britain will face U.S. tariffs if they proceed with a tax on US digital companies. Mr. Mnuchin issued the warning after France agreed to delay the imposition of its own digital tax in the face of threats of steep U.S. tariffs on French exports. Hence the trade tension may rattle the eurozone economy.
Germany Manufacturing PMI
Source: Bloomberg
Germany ZEW current situation
Source: Bloomberg
On the backdrop of this, the ECB is set to bring the formal launch of a strategy review, most likely including a rethink of an inflation goal the bank has failed to meet since 2013. In 2003, it tweaked its medium-term inflation objective from 0-2% to a narrower objective of “below but close to 2%” to guard against the risk of deflation. The review is likely to require more research into the causes of low inflation to examine whether this is a short-term cyclical phenomenon or the result of more long-term structural factors such as digitization, globalization or demographics. Hence the ECB may keep interest rate unchanged today. But its guidance will be important.
Technicals
On the daily chart, EURUSD currency pair is trading below the ’50-SMA’ & ’14-EMA’ which is creating strong resistance around 1.1110-1.1120. Also, the ‘MACD’ indicator has crossed below the zero lines which is a bearish indication for the price. On the contrary, the price is trading near the support of ‘Rising Trend Line’ which is coinciding with ‘100-SMA’ around 1.1070. This level can provide very strong support to the price while coming down. Based on these conditions, we expect the price to remain range-bound within 1.1070 on lower side and 1.1120 on the higher side, for the next few sessions. A breakdown below 1.1070 or a breakout above 1.1120 will decide the further trend in EURUSD. If price breaks below 1.1070, further downside till 1.1040 & 1.0980 is expected and on the reverse side, if price breaks above 1.1120, upside till 1.1170 & 1.1200 can be seen in coming weeks. In a broad view, EURUSD may trade between 1.0980 and 1.1200 for a month to come.
Author: Mr. Rushabh Maru, Research Analyst – Currency & Commodity (Investment Services), 23rd January 2020
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