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Strong euro adds pressure on Draghi to initiate further monetary stimulus

14 April, 2014

Wednesday’s Eurozone CPI inflation report is expected to act as a pivotal point for monetary policy in the region, with inflation actively impacting monetary policy. While the European Central Bank (ECB) has previously failed to act to stimulate the economy despite falls in CPI to 0.5%, should the rate fall even lower this week ECB President Mario Draghi may find his hand forced to implement further monetary easing. The strong euro is counterproductive to the region’s economic recovery, making exports less appealing to foreign investors and pushing inflation down.

Benoît Cœuré, ECB Executive Board member, has revealed that the ECB could buy a broad range of assets with maturities of up to 10 years should a program of further monetary easing be implemented. Even though Draghi himself stated that "A strengthening of the exchange rate requires further monetary stimulus,” analysts expect him to cut interest rates before he implements any additional monetary easing. The euro dropped 0.24% against the US dollar in early trading on Monday to be 1.3851 in response to Draghi’s comments; however it remains to be seen how long the central currency will remain down.

The US CPI inflation data will also be released on Tuesday with the market closely looking to see whether inflation will grow from last month’s rate of 1.1%. A rise would further support the Federal Reserve’s continued tapering of quantitative easing, however disinflation could throw their plan off course. Fed Chairwoman Janet Yellen is due to speak on two occasions at events this week and these speeches will offer market participants the chance to observe any changes in tone from Yellen in relation to monetary policy and the timing of any prospective interest rate cuts. The EUR/USD pivot point is 1.3843, with resistance levels at 1.3850, 1.3859 and 1.3866, and support levels at 1.3834, 1.3827 and 1.3818.

Some volatility is also expected from the British pound on Wednesday with the release of the monthly jobs report. The state of the employment market is one of the key indicators of economic health and any strong deviation from previous data may affect the Bank of England’s (BoE) forward guidance on monetary policy. Last month’s unemployment rate was 7.2% and the new figure is forecast to be 7.1% with the claimant count expected to drop from 34.6k in January to 30k this month. The GBP/USD pivot point is 1.6728, with resistance levels at 1.6734, 1.6745 and 1.6751, and support at 1.6717, 1.6711 and 1.6700.

The Japanese yen has benefited in early trading from greater demand for safe haven assets off the back of fresh tensions between Russia and Ukraine, with JPY up 0.1% against the EUR and 0.3% against the USD. Bank of Japan Governor Kuroda will no doubt be concerned about the strengthening yen and he is expected to reinforce the need to push the yen lower in order to boost exports when he gives two speeches this week on Wednesday and Thursday. Market participants will also be looking to these speeches to see any indications from Kuroda of plans to increase the amount of asset purchases to offset the impact of the new sales tax that came into effect on 1 April. The USD/JPY pivot point is 101.59, with resistance levels at 101.66, 101.69 and 101.76, and supports at 101.55, 101.49 and 101.45.

The Asian market will also be eagerly awaiting the release of GDP figures from China on Wednesday. A fall from 7.7% in Q4 2013 is expected, with analysts forecasting a rate of 7.3% for Q1 2014. Any weakening in the Chinese economy is likely to have knock-on effects to other nations, with the Australian dollar especially likely to come under pressure.

The Reserve Bank of Australia will be releasing the minutes from the last meeting and, with a recent move to a more hawkish tone from RBA Governor Stevens, it will be interesting to see whether there are any indications of plans for interest rate hikes. AUD was trading almost unchanged against USD in early trading this week but the pair is liable to offer some volatility in the Asian session on Wednesday when the China GDP is released. The AUD/USD pivot point is 0.9388, with resistance levels at 0.9392, 0.9398 and 0.9402, and support at 0.9382, 0.9378 and 0.9372.

What to Watch this Week: EUR/USD offers opportunities for volatility, with Tuesday and Wednesday likely to be the main focuses when the key data releases are announced. AUD pairs may be rocked on Wednesday if the China GDP rate shocks the market in any way.

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