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EUR Outlook: How ECB Could Disappoint

By Kathy LienForexSep 11, 2019 03:55PM ET
www.investing.com/analysis/eur-outlook-how-ecb-could-disappoint-200463833
EUR Outlook: How ECB Could Disappoint
By Kathy Lien   |  Sep 11, 2019 03:55PM ET
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Kathy Lien, Managing Director Of FX Strategy For BK Asset Management

Daily FX Market Roundup Sept 11, 2019

Thursday’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. The table below compares changes since the ECB last met when nearly every part of the Eurozone economy weakened during the intervening 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 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 it's 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.

Euro Data Points
Euro Data Points
EUR Outlook: How ECB Could Disappoint
 
EUR Outlook: How ECB Could Disappoint

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HelliumStar ..
HelliumStar .. Sep 12, 2019 11:50AM ET
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I liked today (12th Sep) rolercoaster EUR$USD very much! Thanks to Mr Trump and Mr Draghi! Many pips in profit!
Albert Ureña
Albert Ureña Sep 12, 2019 8:20AM ET
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it happened as predicted. great job with the article Kathy I hope to see your review for next week federal reserve interest rate decision. happy trading for the rest of your week
Gad Beatus
Gad Beatus Sep 12, 2019 6:22AM ET
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we are looking for a sharp short and thats what is going to happen
Albert Ureña
Albert Ureña Sep 12, 2019 6:22AM ET
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with my comment and yours now they can't say we didn't warn them.
Blck Beard
Blck Beard Sep 12, 2019 1:02AM ET
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0.99 :)
Fx Boss
Fxboss Sep 12, 2019 12:41AM ET
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I think 1.08 ,because overall EUR so much weak
Aw wright
DubaiAgainx3 Sep 12, 2019 12:28AM ET
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Fingers crossed for you today Kathy, history thus far dictates you’re around 41% correct with your analysis; statistically you’d be unemployed if you were a Trader!!!
Itachi Uchiha
Itachi Uchiha Sep 12, 2019 12:28AM ET
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Not if you make more money then you loose
Makinda Karim
Makinda Karim Sep 12, 2019 12:27AM ET
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You always the best madam..Be blessed..
Priit Jõesaar
Priit Jõesaar Sep 12, 2019 12:03AM ET
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thanks, Kathy!
Partap Singh
Partap Singh Sep 11, 2019 9:17PM ET
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thank you Kathy
Mukiza Elijah
Mukiza Elijah Sep 11, 2019 7:49PM ET
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it might be a bearish
Kalpesh Shah
Kalpesh Shah Sep 11, 2019 5:46PM ET
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EUR /USD currently @ 1.0087 as of 4.45pm CST looks like huge bearish from 1.10138 will it below 1.10000 mark
Eve Clear
Eve Clear Sep 11, 2019 5:42PM ET
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Why do you think that ?
Jon Daye
Jon Daye Sep 11, 2019 5:19PM ET
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Eur will rocket. Everything is already priced in. Lets argue...
Vallentco Rezon
Rezon Sep 11, 2019 5:19PM ET
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Agree! eurusd will go up
Jim Badrow
Jim Badrow Sep 11, 2019 5:19PM ET
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Let’s not forget that the US has CPI numbers coming in 45 minutes after the ECB rate statement.
Albert Ureña
Albert Ureña Sep 11, 2019 4:38PM ET
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Very well written. I also believe that US Federal reserve will also dissapoint next week. Most investor have a high expectation that another rate cut will happen meanwhile we been seeing decent data coming out from the US that supports a dovish stance and keep rates unchanged. ECB is also on a nutshell, reducing interest is not going to be the solution of their economic slowdown. they need more, or better wording they need help. Keep up the great content Kathy and happy trading for tomorrow
EXOTIC PIP
EXOTICPIP Sep 11, 2019 4:28PM ET
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Very informative
Shabih Minhas
Shabih Minhas Sep 11, 2019 4:16PM ET
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Finally an article with selective words and deep info thanks Kathy Lien
 
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