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ECB QE Exit Turbulence and the Euro
Written by: PaxForex analytics dept - Thursday, 25 October 2018 0 comments
The European Central Bank (ECB) is expected to keep its Interest Rate at 0.00%, its Deposit Facility Rate at -0.40% and its Marginal Lending Facility Rate at 0.25%. Many analysts don’t expect an increase in interest rates out of the ECB until September 2019 at the earliest. The press conference by ECB President Mario Draghi will be closely followed as the ECB is facing a series of headwinds as it is winding down its quantitative easing program. No changes is predicted in its current target to exit QE by December. The words Draghi will choose could give a hint how the ECB currently feels about its decision from one year ago.
Twelve months ago, with a very strong Eurozone economy at its back, the ECB took the first step to get out of QE by cutting the amount of bond purchases by 50%. While the ECB made clear it plans to exit QE by December 2018, it also made sure markets understood that interest rates will move at a much slower pace. Draghi may try hard to avoid a direct answer to any question in regards to interest rates. Strong domestic demand inside the Eurozone boosted growth, but now external risks are far greater while domestic demand is contracting.
Since the ECB decided on a path to exit QE, external developments have pressured the Eurozone economy. Brexit negotiations have been stuck and may result in a no deal Brexit. President Trump is pushing his “America First” policy and the world order is being reshuffled while he also started a trade war with China and several trade disputed with other key allies. This has a negative impact in the Eurozone economy which heavily depends on its exports. Inside the Eurozone, Italy started a budget stand-off and is ignoring calls by the ECB to reduce spending. Eurozone PMI reports have shown a much greater slowdown than expected.
All economic indicators currently point more towards an interest rate easing environment than one which supports tightening. According to a recent survey, the 25 member ECB Governing Council has one vacancy and six neutral votes on interest rates, ten doves who favor the current interest rate environment and eight hawks who prefer higher interest rates. Then there is the lack of inflation as measured by the core CPI. Today is likely to see no change in the status quo and while the €2.6 trillion QE program is coming to an end, proceeds will be reinvested for the time being. ECB QE exit turbulence and the Euro create the following three forex trades to allow a boarding pass into your portfolio.
While the EURJPY has been extending its slide following a breakdown below its horizontal resistance area, given the current market environment this currency pair could further add to its current trend. The Japanese Yen is attracting more bids due to its safe haven status which could force the EURJPY into its horizontal support area, guided lower by its primary
The Eurozone as well as China face trade tensions with the US. It appears that the Eurozone is much closer to resolving their issues which will benefit the Euro over the Hong Kong Dollar. The EURHKD found support at the upper band of its horizontal support area which is being enforced by its secondary ascending support level. Price action is now predicted to complete a breakout above its primary ascending support level as well as above its primary descending resistance level and advance into its next horizontal resistance level. Forex traders are advised to but the dips in the EURHKD.
The Turkish Lira has slowly recovered from the panic selling a few months ago which has resulted in a steady contraction in the EURTRY. This trend is expected to continue as Turkey is getting its house in order as the Eurozone economy is losing steam. Price action pushed below its primary ascending support level as well as below its horizontal resistance level. Its secondary descending resistance level is now expected to force a breakdown below its secondary ascending support level which will take the EURTRY back down into its horizontal resistance area. Forex traders are recommended to sell the rallies.