*Mario Draghi under pressure to address the dire economic conditions in the EZ *Two important levels can be tested depending on the tone of the ECB.
Today is the most important day for traders. The European Central Bank will deliver its verdict on their monetary policy for the Eurozone. The economic clouds have become dark and the ECB is under pressure to respond accordingly.
The economic data out of Eurozone show that growth has become feeble and there is a strong need for more support from the ECB. The bank has lowered its growth forecast for the Eurozone but still the economic situation doesn’t warrant another quantitative easing package from the ECB. Having said this, the policymakers do have every right to take all the precautionary measures in order to handle the situation.
Two Important Factors
This argument becomes even more compelling when we start to factor in two important elements. Firstly, Donald Trump is ready to start another trade war. He hasn’t learned any lesson from the current trade war with China. The war has not only impacted the US economy but also the world growth as well. Despite all that, he is ready for more. In his latest comments, the president has said that he is prepared to slap tariffs of $11 billion worth of imports from the EU. This is surely a matter of concern for the ECB who has fought hard to revive the growth in the Eurozone.
Secondly, the Italian growth and debt conditions have become dire. The country’s growth shows that the recession is on its doorsteps and there is a serious political turmoil as well. The current government is in a battle with the European Commission over its budget deficit. Evidently, there is a strong need for structural reform, but no one is ready for austerity.
No Fireworks Expected
Despite all of this, we are not expecting any major shift in the economic policy from the ECB today. Mario Draghi, the president of the ECB may increase the volume on his warning about the risks to growth and inflation. Looking at the three different manufacturing PMIs (chart below), it clearly shows that the Eurozone is lagging well behind the U.S. and China.
The ECB can no longer afford to remain the weakest link. The structural problems in the five bigger economies in the eurozone have become troublesome for the banks. I expect them to send a clear message to the governments that they need to play their part with respect to the structural reforms otherwise countries like Italy would continue to weigh on the growth.
What will happen to the Euro today?
Since the start of this year, we have seen one clear dominant trend for the currency: it is skewed to the downside against the dollar. Traders have sold the currency on every recovery. They have used this as an opportunity to increase their short positions. The economic data doesn’t warrant the ECB to stay positive, so there is little to no hope for the bulls today.
If the overall focus of the speech is on the negative factors, the Euro could test the support of 1.1174 against the dollar today. On the flip side, if the Bank shows its optimistic side, although hard to think of reasons why they would do that, the Euro could trigger a large number of stop losses. This could result in pushing the Euro-Dollar pair higher to test the resistance at 1.1350.