Market Overview

No Action On QE Front And Rising US Treasury Yields Make Euro's Slide Lower Becoming Its Destiny


This article orignially appeared on FXStreet.

  • The ECB is set to remain silent about the ending of its asset purchasing program.
  • The ECB is set to voice inflation and growth outlook concerns with forward-looking indicators decelerating sharply of late.
  • On balance, sacrificing the Euro’s strength is the possible outcome of the Trans-Atlantic monetary policy divergence that pushes US Treasury yields higher. 

The ECB Governing Council meeting scheduled for this Thursday is likely to turn to be a yawning experience for both participating policymakers as well as the market player.The Eurozone inflation accelerated in March to 1.3 percent over the year, up from 1.1 percent in February, but the core inflation remained subdued at 1.1 percent over the year in March. Moreover, the inflation still remains well below ECB 2 percent inflation target and this is the main argument why the ECB President Mario Draghi will remain reserved about the end of the asset purchasing plan in April and will leave the action for early June instead.

Regarding the economic development, the ECB is likely to take the note of the forward-looking indicators decelerating of late. The Eurozone composite purchasing managers’ index (PMI) remained at the unchanged level from March at 55.2 in April manufacturing decelerated sharply and services increased, copying Germany’s pattern. German composite PMI surprised on the upside rising 0.2 points to 55.3 in April with manufacturing activity decelerated less than expected to 58.1 from 58.2 in March and services PMI increased to 54.1.

The forward-looking indicators for Germany though disappointed in April. Since February this year, the ZEW index of investors confidence fell from 17.2 level to -8.2 in April. So it took just two months for ZEW index to swing from positive to negative reading last recorded in July 2016 when the sentiment was hammered by post-Brexit referendum uncertainty.

The IFO business climate indicators also decelerated below market expectations falling to 102.1 in April, down from 103.3 in March. The development of IFO business climate index was partially affected by the index adjustments in terms of the width of the survey as the number of respondents was increased to 9,000 entities and the basis of comparison of the current standing of the IFO business climate indicator was changed from 2000 to 2005.

Still, German and the Eurozone companies, in general, suffers from uncertainties related to the future of trade relationships after the US-led trade barriers as well as the strength of Euro, that makes some of the Eurozone originated production less competitive and darkens the economic outlook.

With the US President Trump concept of using Twitter to announce the official policy, there is a lot of noise on the market stemming from the brewing trade conflict and military action in Syria. On top of it, the euphoria of French President Macron and German newly appointed Chancellor Merkel repairing the Eurozone is fading. Both factors benefiting the ECB doves rather than hawks. And that is unlikely to be altered by the fact that the current asset purchasing program is still officially ending this September with the ECB communication refraining from hints about its future.

As the uncertainty prevails for now and the plethora of risks are emerging for the growth and inflation outlook, the upcoming ECB meeting may turn out to be dive the Euro in the sea of words. Especially as the US benchmark Treasury yields are attacking the 3.000 percent that id once crossed, the Euro’s downward slide is set to be its destiny.

Posted-In: News Eurozone Forex Markets


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