Extension of European monetary stimulus sent EUR/USD down to the lowest level since June, 2017

Mario Draghi offered the EUR/USD bears more than they had expected. However, will the monetary stimulus, announced in March, be able to solve the problems of the euro-area economy. The central bank admitted that they had come from outside, and the troubles had been caused by protectionism, geopolitical uncertainty and a decline in global economy. The currency block is very responsive to all of this, and its GDP rate will hardly grow by more than 1.1% in 2019. It is much worse than the Governing Council expected in November (+1.7%). Maintaining the negative interest rate, the ECB hits the banking system; and it is hard to expect a strong economy without strong banking.

Lower projections for the GDP and the inflation rates (from 1.6% down to 1.2% in 2019) turned out to be stronger than investors had expected. In addition to the announced launch of the LTRO in September and about the central bank’s willingness to hold the current interest rate not until autumn, but through at least the end of 2019, it sent the EUR/USD down to the lowest level for over 20 months. The derivatives market has put off the start of monetary normalization from June till September 2020, and Mario Draghi has set the bulls back by the announcement that the decisions were taken unanimously. Furthermore, Bloomberg, citing sources in the Governing Council that wished to remain anonymous, said that some of its members consider the reduction of forecasts to be insufficient.

Dynamics of euro-area GDP

Source: Bloomberg. 

The ECB is obviously trying to be proactive. Previously, it was repeatedly accused of being too slow. In particular, a reason for the criticism was that European QE was launched at the moment when the US quantitative easing program of had been already over. In this regard, the LTRO start in September looks like a try to please the banking system. It will still have to operate with negative interest rates, but for at least 9 months, it will not experience any liquidity problems. The bulk of the ECB’s TLTRO will mature in June 2020.

Terms and volumes of TLTRO maturing

Source: Bloomberg.

Frankly speaking, the EUR/USD bulls are likely to be challenged. Mario Draghi has provided their opponents with more advantages than they expected. Moreover, the China's foreign trade data prove that the skies are darkening over the export-led euro area. In February, China’s exports were down by 20.7%, which is the worst performance since February, 2016; imports were 5.2% Y-o-Y. As a result, trade surplus has been the least since the country featured deficit in April 2018.

The euro buyers may be discouraged even more by the report on the US labour market. They may discuss that the USD uptrend is broken, but positive employment data will make the EUR/USD more likely to go on falling down towards 1.11. Weak data, on the contrary, will support the euro growth. In this case, it first needs to consolidate at the bottom of the prior consolidation range at 1.125-1.15.


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Price chart of EURUSD in real time mode

ECB sent euro down

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