By Jameel Ahmad, Chief Market Analyst at FXTM
The EURUSD has continued to be sold over the past 72 hours, after the ECB became the first major central bank to introduce negative deposit rates and the markets had time to digest Draghi’s dovish press conference following the ECB rate decision.
While the new ECB policy measures were announced, the EURUSD behaved erratically. Within one hour, the EURUSD plummeted to match a yearly low, before rallying back to record a weekly high. This occurred after it emerged that the ECB had refrained from adding QE stimulus on this occasion.
The ECB announced an assortment of new policy measures, in the hope of reinvigorating economic growth and countering the threat possible deflation poses over the EU economy: the new stimulus measures, a new record low 0.15% interest rate and the ECB becoming the first major central bank to introduce negative deposit rates. The latter means that banks will now be charged for leaving their cash within the bank, with the hope that banks will now feel more inclined to lend money to consumers.
Recently, there have been increasing indications that the EU economic momentum is starting to slow down, and this further encouraged the ECB to act. For example, during the previous quarter, EU GDP growth expanded by only 0.2%, missing the 0.4% expectations. Unusually, there have been raised eyebrows over some of Germany’s recent economic performances, including unemployment unexpectedly increasing by 25,000 in May and an emergence of speculation that Germany’s future GDP could miss expectations.
In regards to the United States, its economic performances have progressed. In total, the US economy has added nearly 500,000 jobs to its payroll within the past two months, and has now regained all of the 8.7million jobs they lost during the recession. For the past four months, the US has consecutively added over 200,000 jobs to its economy, something that had not been achieved for over a decade. Finally, throughout May, initial jobless claims averaged their lowest number in seven years.
It is not only the employment sector which is recording improvements. Consumer confidence recently advanced towards its second highest reading in six years. Coupled with wage growth expanding by over 2% in May, there is optimism that this will lead to an improved Advance Retail Sales reading this coming Thursday.
Overall, it didn’t fully surprise me how the market reacted to the ECB interest rate decision. The EURUSD had already fallen by 400 pips over the past month. A further rate cut and the introduction of negative deposit rates had already been priced into the markets. The ECB refraining from entering a Quantitative Easing program is what provided the short term rally.
Moving forward, we must take into account the overall dovish tone Draghi displayed throughout his press conference. Although the ECB may have refrained from adding QE on this occasion, Draghi announcing that the ECB is far from finished implementing new stimulus measures suggests that if the ECB lowers interest rates to 0% in the future, QE will be next. Additionally, Draghi downgrading future GDP forecasts suggests that upcoming EU data will continue to re-alert the EURUSD bears.
On the other end, US economic data is looking positive. The Federal Reserve has already admitted that US economic growth is set to expand throughout the rest of the year. Although confidence in the USD has not yet returned, consistent economic performance will lead to increased confidence in the Greenback.
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