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Are we ahead of new unprecedented easing measures by the ECB?

Discussion in 'Current Market Sentiments' started by fx-recommends, Feb 24, 2014.

  1. fx-recommends

    fx-recommends Content Contributor

    Aug 6, 2008
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    The ECB president Mario Draghi has tried to tell the market that the picture of the European economy is really mixed currently and he has repeated this message during the weekend by another way saying that I have to be cautious as we are not seeing strong unambiguous developments but we are seeing first signs of a development can be protracted in time and strong in another time.
    Draghi has tried to join the pro-growth atmosphere in the G20 meeting in Sydney during the weekend saying that the ECB will act in the case of seeing any medium-term setback over price stability but until now the ECB does not watch emerging deflation risks drive the buyers to set back waiting for lower prices in the future and if it is to see so, it will not hesitate to add more stimulating measures.

    So, The ECB has tied the next easing step to the movement of the prices as usual to maintain the inflation below but close to its yearly target at 2% but the inflation is now well below 1% yearly for the fourth consecutive month by coming today at 0.8% y/y in Jan and that makes the market vigilant and uncertain in the same time about the next movement of the ECB.
    The ECB language following its interest rate cutting on the 7th of last November could not direct the market to nothing but the ECB ability to watch and endure lower prices power in this period of time with no easing action from its side and it has highlighted this stance by lowering its inflation expectation in a time and in another time by referring to the extension of the easing prices upside risks on the current slow growth pace, while there is no tightening of the money markets occur or worsening of the inflation outlook over the medium term.
    It has tried to tell the market that it will be less sensitive to the down ward prices pressure, it has avoided saying that it is watching the prices easing over the medium term and also it has tried to not mention the name of deflation in EU.
    The recent ECB bulletin release has said that 2014 EU HICP has been revised down to 1.1% from 1.5% in the previous forecast which was in the last queerer of last year and for 2015, it has reduced it to be 1.4% from 1.6% and for 2016, it is expected start projecting about it in the next meeting of it telling that it is to be close to 1.7% by God’s will.
    While the preliminary readings of EU manufacturing and services PMI have shown slower pace of expansion in Feb and however Q4 EU GDP flash reading growth came better than expected at 0.3% q/q while the market was waiting for 0.2% from 0.1% in the fourth quarter, It is also looking in need to be pushed up at least to produce higher number of jobs while the unemployment rate is still standing close to 12%.
    From another side, I can say that this faster than expected real growth rate can be a nature result of the lower than expected pace of prices increasing in the fourth quarter.
    The ECB has maintained its forward guidance which propose having the interest rate at this current level or may be lower for stimulating the economy but it has tried also to avoid talking about the nature of the next easing step if it is to be imposed saying just everything is possible of the treaty mandates.

    But is it to be by another cutting of the interest rate? and if it is so, can the ECB drive the deposit rate down also to be below zero as it has mentioned several times by its president draghi that it is ready technically to take this step?
    The head of Bank of Italy and the ECB Member Visco has said today that the ECB would consider introducing negative deposit rates at the upcoming monetary policy meeting but he added that he is not certain whether any action would be taken.
    Last week also, the ECB Governing Council member Luc Coene said ECB is prepared to take policy action, if the inflation to drop further but he said too that it was still too early to make any movements at the moment.
    Before that and by the end of last year, the ECB Governing Council member and Malta's central bank head Josef Bonnici sent a similar message telling that the ECB is prepared to introduce the negative deposit rate, although such movement could have adverse implications.
    He is right too, as it can lower the banks profits putting more pressure on the banking system which is still in recapitalization path and it may be in need to another LTRO.
    So, another round of LTRO with different easier conditions can be also the next easing step of the ECB and as its governing council member Ewald Nowtony has also figured out previously in his talking at CNBC as his favorite option to stimulate the economy as LTRO3 can help also the EU banking sector and bring more stability back it and offer better crediting conditions.

    Anyway, the main market worry about the EU economy is that to be in an early stage of facing deflation cycle can persist taking it into recession like what has happened in Japan and persisted in the past 15 years and lead it to adopt last year ultra easing policy for targeting 2% inflation rate yearly which caused massive falling of the Japanese yen value by 18% versus the greenback.
    The single currency appreciation can be also criticized at this current stage by the ECB members as it is not welcomed to them with the current weak prices power and the need for higher EU exporting activity to push the economy forward.
    So, The ECB member Christian Noyer came recently to follow Nowtony’s stance saying that it is clear now that the high single currency exchange rates hurt the EU exports and such comments can be repeated weighing on the single currency by God’s will.

    The single currency has fallen again today after peaking at 1.377 well below its previous resistance at 1.3772 and God willing, it can meet now in the case of falling further supporting level at 1.3684 can be followed by 1.3560 before 1.35 psychological level which can be penetrated to pave the way to 1.3476 again which can be followed by 1.3397 before its recent formed bottom at 1.3294 which has been reached on the 7th of last November while the expected standing supporting levels below it are still existing at 1.3229, 1.3104 before 1.30 psychological level while going up again from here surpassing 1.3772 can be met by resisting level at 1.3818 before its recent high at 1.3893 which has been reached on the 27th of last December following gaining upside momentum after breaking its previous resistance at the 61.8% Fibonacci correction level of the falling from 1.4938 to 1.2042 at 1.3834 which could hold the pair back last October.

    Kind Regards

    FX Market Strategist
    Walid Salah El Din
    Mob: +20 12 2465 9143
    E-Mail: mail@fx-recommends.com

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