Following the FOMC meeting, investors switch to Italy

The Fed can hardly be charged with being less aggressive than it used to be in September. The interest in in the FOMC meeting in November was originally stirred up with the question: what will the central bank focus on? If it would be a decline in the inflation growth or strong employment data. The fact that, in terms of inflation, nothing new has been said, but “the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined” suggests that the hawks are dominating. With this respect, the EURUSD slide towards the bottom border of the trading range of 1.13-1.15 looks quite natural.

No matter how many times they have projected a slowdown in the US GDP growth, the end of economic cycle and a slower monetary normalization by the Fed, all of these are just assumptions. But the Eurozone economy expansion has, in fact, slowed down. The European Council has also admitted it and cud down projections for the euro area GDP to 1.9%, compared to 2% in July. In 2017, it was about 2.4%, in 2018 – about 2.1%. Among the major reasons for the slower economic growth, Brussels names global trade conflicts, the Italian political crisis and the potential overheating of the US economy. A decline in the GDP rate is faced by many European countries; the matter is especially important for Italy.

Forecasts for GDP in euro area member states 

Source: Bloomberg.

The European Commission warns Italy that the suggested draft budget will result in the budget deficit of 2.9% and 3.1% in 2019-2020. In the latter case the 3% limit will be exceeded. The European Commission expects the GDP will grow by 1.2% (the Bank of Italy expects 1% increase); however the Economy Minister Giovanni Tria doesn’t agree with the calculations and insists on the 1.5-percent economic expansion. Mario Draghi hits back calling on governments to pay off the national debts in order to strengthen the euro-area economy in the environment of possible future economic shakes, resulted from trade protectionism, the weakness of emerging markets and high volatility.

The opponents go on exchanging fire, and the war may begin on November 13, when the term, given to Rome to rewrite the rejected budget plan, expires. Italy is being threatened by sanctions and financial penalties, which may be supported and implemented by the ECB. In particular, according to Bloomberg, the volume of Italian bonds purchases in the suggested maturing bonds reinvestment is likely to be reduced by €750 million. It doesn’t seem too much, compared to €338 billion, needed by Rome to refinance its public debt; but it is likely to affect the bond yield.

Projected changes in the assets purchases volume 

Source: Bloomberg.

So, the economy growth-gap, together with the difference in monetary policies and strong political risks in the euro area, is still playing to the EURUSD bears’ advantage. Yes, the foundation doesn’t look steady, and the US GDP might start slowing down, and the euro-area may feature a faster economic expansion. Until there are any signs of the eurozone economy’s recovery, the euro is going to slide down lower if the support at 1.13 is broken out.

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Price chart of EURUSD in real time mode

Euro Shooting Back

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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