08.02.2019 03:04 PM
EUR / USD. European Commission report: "everything is bad and will be even worse"

The European currency cannot get out of the tangle of fundamental problems. At the beginning of this year, almost all macroeconomic indicators of the eurozone disappointed. Germany's consumer price index, data on the growth of GDP in Italy, France, and the entire eurozone, all of these indicators were in the "red zone", showing a negative trend.

Against this background, the euro-dollar pair did not keep within the 14th figure, and gradually approaches the borders of the 12th level. The price has consistently declined for more than a week after the EUR / USD bulls have updated their annual maximum at around 1.1502. Despite the ambiguous dynamics of the dollar index, the pair bears still have a common advantage, although the downward movement is not of an impulsive nature.

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The latest blow to the euro was yesterday's report by the European Commission, in which a new outlook for economic growth in the eurozone was published. Its essence boils down to a disappointing conclusion: "everything is bad, and it will be even worse." Thus, according to the EC, this year the eurozone economy will increase by only 1.3%, and next year, by 1.6%. For comparison: last fall, the European Commission had a completely different opinion, an increase of 1.9% in 2019 and two percent in 2020.

There are several reasons for such a radical revision of forecasts, but all of them are somehow connected with China. According to the EC, the slowdown of the economy of the Middle Kingdom will lead to a slowdown of the global economy, and the trade war between the United States and China will only aggravate the situation. Also, Brussels actually admitted that it doubted the successful outcome of trade negotiations between Beijing and Washington. Judging by the report of the EC, this factor is associated with the main risks that influenced such negative forecasts.

It is noteworthy that the report of the European Commission was the most pessimistic, compared with similar forecasts, which were published earlier by other financial structures. For example, according to the International Monetary Fund, the EU economy will grow by 1.6% this year. According to the European Central Bank, by 1.7%.

If we look at the structure of the published report, we can make an obvious conclusion: economic growth will slow down to some degree in all EU countries. In this context, Germany, the "locomotive of Europe", is of primary interest. The European Commission lowered the forecast for German GDP growth to 1.1%, whereas previously this figure was at around 1.8%.

It is worth recalling here that at the end of January, the German Ministry of Economy reported that the forecast for the growth of the national economy this year was lowered to 1%. This is a significant revision, as the Germans previously hoped to grow to 1.8%. In other words, here the estimates of the European Commission and the German government almost coincide. And this is a very sad fact since it is very likely that the German economy will pull European-wide indicators behind it, especially against the background of a slowdown in the rest of the eurozone countries. In particular, the growth forecast for the Italian economy was immediately reduced by one percentage, that is, from 1.2% to 0.2%.

This means that, in addition to economic problems, we should expect political ones, when at the end of this year, Italy will impose its budget for 2020. Last year, Brussels and Rome were able to find a compromise, but this was preceded by months-long political battles that put background pressure on the euro. With a high degree of probability, this year this situation may recur, and it is far from a fact that it will end with a happy ending.

Thus, the report of the European Commission once again reminded traders that the key to tightening the monetary policy of the ECB is in China. This simple fact enhances the role of the negotiation process between Beijing and Washington, because the outcome of the global economy, with all the ensuing consequences, depends on their outcome.

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To the dismay of the EUR / USD bulls, the anxiety about the success of the US-China dialogue only increases. For example, Donald Trump today surprised traders by not meeting with PRC Chairman Xi Jinping, at least until the negotiation deadline, which is set to be on March 1. This statement is indeed somewhat puzzling. The fact is that he recently said that in order to conclude a trade transaction, he needed to meet with the Chinese leader in order to "discuss some difficult issues." Taking into account the latest statements of Trump, the market once again spread rumors that the negotiation process is "stalling," and the trade war could flare up with a new force in the spring.

Despite such a "bunch" of negative fundamental factors, the bears of the pair will not easily overcome the important support level of 1.1305 (the bottom line of the Bollinger Bands indicator on the daily chart). Overcoming this target will open the way to the 12th figure, but for such a price movement a strong news impulse is needed.

Irina Manzenko,
Analytical expert of InstaForex
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