European economy fails to recover, undermining the credibility of the central bank

Nothing lasts longer than the temporary. The markets less and less believe in the ECB assurances that the euro-area economy should restore during the rest of the year, and so, they are selling the euro off. Mario Draghi and his colleagues emphasize the problems of the Germany’s industry, as it must meet the EU targets to reduce emissions; bad weather and strikes. However, they shouldn’t ignore such factors as trade wars, Italy’s political crisis, Brexit, high oil prices and exhaustion of monetary stimuli. Weak statistics on the euro-area GDP rate in the third quarter is the further evidence of it, shaking investors' confidence in the ECB.

European economy was expanding by 0.2% M-o-M and by 1.7% Y-o-Y, failing to meet Bloomberg experts’ forecasts of 0.4% M-o-M and 1.8% Y-o-Y. It has shown the worst performance for four years and is back at the levels, where from the ECB launched its quantitative easing program. Simply put, the currency block showed investors how it would look after QE, bringing back the idea to extend the asset purchase program in 2019. Disappointing statistics has dropped Citigroup economic surprise index down to the lowest levels since July. Currently, it is the worst among global largest economies.

Dynamics of Euro-area GDP rate

Source: Bloomberg

Dynamics of economic surprise index

Source: Bloomberg

The situation has been fueled by S&P Global Ratings and Italy. The agency warned about higher risks of no deal between the EU and UK. If the pessimistic scenario comes true the UK rating may be downgraded. Italy has featured zero GDP growth, which is the worst performance since 2014. On an annual basis, Italy’s economy has expanded by just 0.8%. Do they really believe in +2% and more to cut down Italy’s debt-to-GDP ratio, with its 2.4-percent budget deficit? Brussels has got an additional argument against Rome, and extended political risks won’t encourage EURUSD bulls.

The U.S. dollar, on the contrary, is supported by increase in the consumer confidence up to the highest level since September, 2000. If investors worry about possible recession, consumers have a completely opposite opinion. The economic growth-gap is working to the euro bears’ advantage, the matter is how long it will last. According to Silicon Valley Bank, which has suggested accurate projections during the last three quarters, the USD will be 1%-2% up, and then, it starts going down. The combination of S&P 500 correction, decline in the Treasury yield, stronger influence of trade wars on the US GDP growth will scare away investors from the US assets.

In my opinion, there is some reason. The US economy can’t expand at the same pace as in the second and third quarter endlessly. I don’t think things are that bad in the euro area. Breaking through the August's lows will encourage the EUR/USD bears to draw the quotes down towards 1.118-1.121. But will the rate move lower?


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Price chart of EURUSD in real time mode

Euro Casts Stones at ECB

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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