EUR Outlook - How ECB Could Disappoint | DZHI - DZH International 
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EUR Outlook - How ECB Could Disappoint

  • Kathy Lien
  • 12 September 2019

 

Daily FX Market Roundup Sept 11, 2019

 

Tomorrow's European Central Bank monetary policy announcement is the most important event risk of the week and we are not surprised that EUR/USD broke below 1.10 ahead of this rate decision.Investors have big expectations for this meeting because of widespread deterioration in the Eurozone economy and talk of recession in Germany. Euro hit a 2-year low last week against the US dollar as German bund yields tumble deeper into negative territory. Back in July Draghi brought up the benefits of a combination of measures and since then the need for stimulus intensified. While investors are preparing for a massive dose of stimulus, there's also a reasonable chance the ECB will under deliver.

 

The Eurozone economy needs help. According to the table below that compares changes since the ECB last meeting, nearly every part of the Eurozone economy weakened over the past 2 months.Retail sales, inflation, employment and manufacturing activity slowed across the region and in Germany, growth contracted in the second quarter. The region's largest economy is crippled by weak global growth and a collapse in manufacturing. Not only did the PMI manufacturing index fall for the eighth month in a row but it reached to its weakest level in 7 years. The Bundesbank said there's a very good chance that Germany will fall into a technical recession in the third quarter. With a tense trade war and weakening US and global growth, the grim outlook for the region is why the ECB needs to find ways to stimulate the economy.

 

The European Central Bank has many options including a rate cut, stronger forward guidance, a new program of asset purchases and compensation for banks to relieve the negative effects of negative interest rates.They prefer a combination of measures because they feel that a package is "more effective than a sequence of selective actions." The market expects a minimum of a 10bp rate cut. If the central bank combines this with rate tiering or a new Quantitative Easing program, EUR/USD will sell off aggressively but if all they do is cut rates and strengthen their low rate pledge, euro will soar in disappointment.

 

With the euro so weak, less aggressive measures could trigger a sharp short squeeze in the currency.Unfortunately, there's resistance to a package that includes QE - one of the strongest forms of easing. Bank of France Governor Villeroy is skeptical of the immediate need for QE while German and Dutch policy makers also believe its too early for the move. Given the market's lofty expectations, EUR/USD traders could be setting themselves up for disappointment. Draghi could also opt for a stimulus package that does not include the most aggressive measures to leave his successor Christine Lagarde with ammo to fight a deeper slowdown.

 

 

 

 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.