We have just had the ECB monetary policy meeting where the ECB kept monetary policy unchanged which was widely expected.
Where is the euro heading from here?
Our view of the fundamentals, sentiment, and technicals below…
ECB Monetary Policy Decision April – As Expected.
The European Central Bank (ECB) did exactly as most forecasters predicted – They left their key interest rates unchanged and reaffirmed the message they gave at the last meeting that their net asset purchases under the Asset Purchase Programme (APP) are expected to end in the third quarter of this year.
“The ECB left its policy statement almost entirely unchanged from the March decision, with the APP still expected to conclude in the third quarter, and interest rates to rise ‘some time after’ the conclusion of the APP. With the APP not ending until July at the earliest, a rate hike before September now looks less likely.” (MUFG)
The market was looking for a hike as early as July and expect a move up to 1.00% this year which is unlikely to happen.
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ECB Press Conference – The Views Of ECB Chair Christine Lagarde
Christine Lagarde was dovish in her press conference and noted the rise in core inflation is uncertain. This view means that rates won’t be going up quickly despite inflation likely to move higher in the short term and remain elevated going forward.
She also noted the labor market is improving but wage growth remains muted. Risks to the economic outlook are tilted to the downside and the downside risks have increased substantially.
In conclusion, the message is dovish as the ECB prioritizes growth over inflation.
The Bottom Line in Terms of Euro Zone – Recession and Stagflation Coming
The bottom line is the zone is being hit hard by the Ukraine crisis. Commodity prices particularly energy prices have soared and growth in the zone has been hit hard.
We will see the zone fall into recession going forward and with inflation likely to stay elevated we have the prospect of stagflation.
“It would now require a severe recession or a sharp drop in headline inflation forecasts for the ECB not to stop net asset purchases over the summer.” (ING)
Inflation won’t be coming down but a recession looks almost guaranteed in our view.
Even if they end the current asset purchase program they will put another one in place to replace it things are that bad in the zone.
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Divergence in Growth and Monetary Policy Favors More USD Strength
The zone is in deep trouble and we expect the economic situation to worsen. US GDP growth in the US is double the GDP growth in the eurozone and the Fed is expected to raise rates every month this year.
Economic growth favors the USD and so do rate differentials both now and going forward.
In terms of EUR/USD, the big trend is down, and for long-term trend followers, the potential for profit is excellent in our view from both more USD strength and an attractive carry interest rate in the USD’s favor.
Technical Analysis EUR/USD
The big trend on the monthly chart is down and we have been in a downtrend since June 2001 when we topped out at 1.240.
We are now below the 1.1000 level which we now expect to act as first level resistance and the second level is at 1.1100.
We have support at 1.0500 and longer-term for further support we would have to look back to 2002 when we hit 1.000 which we see as a long term target.
On the daily chart, we view the EUR as a sell into resistance levels indicated – the big trend is down and has far further to run in our view.
Not investment advice. Past performance does not guarantee or predict future performance.
