According to Mario Draghi, the euro-area economy is going back to norm, rather than slowing down
The EUR/USD bulls have been discouraged by the weak IFO Business Climate Index in Germany and the fact that Mario Draghi has admitted obvious things. The ECB president has noted a slowdown in the euro-area growth pace and weak rise of the core inflation. He has also announced that, despite the central bank is to start winding down its €2.6 trillion quantitative easing program in December, the monetary policy will remain ultra-easy.
The European central bank, like the Fed five years ago, is going to end QE; but the recent market tantrums make it be very careful about the markets’ future response. Mario Draghi and his colleagues have been preparing investors for quitting their bond-buying program in December for quite a long time; so, this factor has already been included in the major currency pair quotes. Earlier, the Governing Council was confident that the Eurozone economy would recover its former growth pace after the weak start, explaining the latter by seasonal factors. Now, the Super-Mario declares the GDP rate decline to result from the economy return to its normal state. Said, it was growing too fast last year. Even if the ECB president tries to sound optimistic, stating that the increase in average wages growth suggests a higher core inflation rate, investors still have doubts.
Dynamics of euro area inflation
According to JP Morgan and Barclays, the European central bank should offer the Targeted longer-term refinancing operations (TLTROs) in order to support the economic expansion in 2019. The ECB Chief Economist Peter Praet has to acknowledge the recent slowdown in the euro-zone economy, naming such reasons as protectionism, emerging markets’ vulnerabilities and strong financial market volatility .
The EUR/USD bears have been supported by Donald Trump’s speech. The U.S. president has promised to boost the tariffs on Chinese imports by $267 if his meeting with Xi Jinping in Buenos Aires doesn’t result in a trade agreement between the U.S. and China. Investors believe in the improvement in U.S.-China trade relation, as the USD/CNH risk reversal is down at the lowest level since June. That is why such threats lure them to safe-heaven assets.
Dynamics of USD/CNH risk reversal
At the same time, the euro looks more optimistic as the Italian government is willing to cut its 2019 budget deficit form 2.4% down to 2.2%-2.3% from the GDP in order to avoid the EU sanctions. According to the Italy’s deputy Prime Minister Salvini, Italian government is not going to stick to the decimals, seeking to defend people rather than figures; so they’ve agreed to wait for the technical reports about those planned reforms in order to precisely assess the costs.
In my opinion, the EUR/USD consolidation results from not only controversial news from Europe, but also from the expectations of second estimate of the U.S. GDP and the minutes of the FOMC meeting in November. They may push the euro up from the trading range of $1.125-$1.147.
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