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15.06.2018 04:27 AM
EUR/USD: Do not rush to bury the euro

So, the key events of the trading week are behind us: now we can sum up the first results by evaluating dispositions and prospects. The Fed and the European Central Bank have spoken, to some extent surprising the market with the sounded position. In a kind of two-day confrontation, the dollar won after all, having received support from the Fed. In turn, the European currency looks like an outsider throughout the market - fears of traders were justified, despite the preliminary optimistic mood.

If you ignore the details and consider the situation in general, it can be concluded that the euro/dollar is declining due to the dissociation of the monetary policy of the Fed and the ECB. This fact again reminded of itself - while the Fed hinted at an acceleration of rates of rate hike, the European regulator showed indecision and caution. Let me remind you that at the June meeting, ECB members retained all the parameters of the monetary policy (which is expected) and extended the QE program until the end of this year, while reducing the volume of assets redemption by half, that is, up to 15 billion euros (from October to December).

It can not be said that this decision dumbfounded the markets. Such a scenario was discussed, however, not among the main ones. Experts admitted the fact that Draghi would again show his indecision (like many members of the ECB) and take a half-hearted decision. True, analysts expected a more significant decrease in the volume of purchases - up to 10 billion euros by the end of the year.

By the way, the worst scenario of today's meeting was that Draghi will postpone the discussion of QE folding for July, allowing the program to be prolonged for an indefinite period. Therefore, the results of today's meeting can not be called catastrophic for the euro. Yes, the single currency paired with the dollar is now losing its positions and, most likely, will again test the support level 1.1570 (the bottom line of Bollinger Bands on the daily chart), however, the events of recent days are unlikely to "bury" the European currency. There are several arguments in favor of this statement.

Now the market is trading on emotions, as during one day the Fed surprised with A "hawkish" attitude, and the ECB disappointed with a too soft position. Such a sequence can not be ignored a priori, and in the medium term, will be difficult for the bulls of the eur/usd pair to seize the initiative. But when emotions subside, the market will "remember" some of the nuances that will support the Euro, albeit belatedly.

First, the ECB said that the stimulus program is not likely to be extended for the next year. That is, now we have a clear time boundary, which the regulator will cross only in an emergency (a significant slowdown in inflation and GDP, rising unemployment, political uncertainty). If the current dynamics of economic growth in the eurozone continues, Europe will "say goodbye" to QE on December 31.

Secondly, the European Central Bank for the first time in a long time began talking about raising the interest rate. And although today it is only about how long the rate will not be exactly raised (at least until the summer of 2019), traders still have temporary benchmarks in this matter. This has been talked about in the market before, but at the level of rumors, guesses and inarticulate comments of regulator members. Now there is a fairly clear sequence: the completion of QE in December 2018 - an increase in the interest rate in the second half of 2019.

Of course, the above algorithm of actions will be implemented only if inflationary indicators increase. Mario Draghi highlighted this fact in a separate line, saying that the forecast for the rates "is tied to the situation with inflation." At the same time, he voiced very optimistic forecasts. In his view, overall inflation is likely to be in the realm of current levels before the end of this year, but the basic inflation indicator will gradually increase. The head of the ECB also raised the forecast for the growth of the harmonized consumer price index – both within the current year and within the next two years.

Thus, according to the officials of the European Central Bank, in the long term there are all the prerequisites that the stimulus program will be completed before the end of this year, after which the regulator will pause and begin discussing the issue of raising rates. These assumptions are consistent and depend mainly on the growth of inflation in the eurozone.

If the CPI and other inflation indicators show a positive trend, traders will gradually increase the likelihood of tightening monetary policy in 2019, especially in the light of personnel changes among the ECB leadership. In turn, the Fed took a "hawkish", but rather vague position on the future prospects. Jerome Powell allowed a fourfold increase in the rate this year, but at the same time admitted that the regulator is approaching a neutral level of rates. The market has traditionally "grabbed" for the near future, ignoring the "alarming bells" in Powell's rhetoric. However, this is a topic for a separate conversation.

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In summary, it should be noted that the behavior of the eur/usd pair now fully corresponds to the current fundamental background. At the same time, when the pair falls into the area of 1.1570-1.1550, it is necessary to be very wary of selling the pair. Although the European Central Bank has taken a very cautious position, it has also laid the foundation for strengthening the single currency in the long term.

Irina Manzenko,
InstaForex के विश्लेषणात्मक विशेषज्ञ
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