EUR/USD May Fall on EU Commission Forecast


Euro Forecast, EUR/USD Technical Analysis, Eurozone Economy – Talking Points

  • Euro may fall if EU Commission Q4 forecasts unnerves investors
  • EUR/USD decline after breaking October uptrend may accelerate
  • How will officials address slower growth with limited fiscal room?

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Euro selloff vs the US Dollar may be exacerbated if the economic outlook from the European Commission reinforces growing fear about the Eurozone’s growth prospects. This follows the IMF’s gloomy recent gloomy regional outlook report. Data out of Europe has been tending to miss economists’ forecasts as the continent struggles with tepid inflation despite the recent reintroduction of QE and deeper interest rate cuts.

Former Managing Director of the IMF Christine Lagarde has taken the mantle of ECB President who signaled that rates could be “lower”. While Brexit uncertainty has temporarily cooled and EU-US trade tensions are thawing, the structural issues undermining the region’s economic growth persist. A key issue is the limited room EU member states have in their ability to use fiscal spending to boost spending and inflation.

For most of the region, the slowdown remains externally driven. However, some signs of softer domestic demand have started to appear, especially in investmentOn balance, Europe’s growth is projected to decline from 2.3 percent in 2018 to 1.4 percent in 2019.More broadly, the weakness in trade and manufacturing could spread to other sectors—notably services—faster and to a greater extent than currently envisaged (IMF Regional Economic Outlook: Europe).

Subdued inflationary pressure supports the position to keep monetary policy accommodative, though with the taps already practically on full blast, the impact of the ECB’s liquidity provisions is relatively muted. After a decade of ultra-easy credit conditions, loose policy has become the new normal. Deeper rate cuts into negative territory may therefore not provide the upside boost to inflation officials are aiming to achieve.

As a result, officials may start looking to fiscal measures to boost economic growth. However, the growth and stability pact limit the ability of member states to exercise their fiscal measures. As the report puts it: Countries with ample fiscal space [like Germany] should take measures to boost potential output, while countries with elevated debt and deficit levels [like Italy] should generally proceed with fiscal consolidation”.

The last time Rome attempted to pioneer fiscal exceptionalism, it sunk the Euro and caused Italian sovereign bond yields to climb over 300 percent. Policymakers therefore have to find a way to reconcile maintaining the institutional integrity of the growth and stability pact – in order to prevent states from flirting with sovereign debt crises and wrecking the Eurozone – and letting members exercise greater fiscal autonomy.

EUR/USD Forecast

EUR/USD recently broke the October uptrend as negative RSI divergence pointed to slowing upside momentum. The pair is now flirting with support-now-turned resistance as fundamental factors continue to catalyze downside moves. Looking ahead, traders will wait to see how EUR/USD interacts with the 1.1073 inflection point and whether the pair will capitulate or attempt to trade above it.

Market Analysis of the Day: EUR/USD Wrestles with Support-Now-Turned Resistance

Chart showing EUR/USD

EUR/USD chart created using TrafingView

EUR/USD TRADING RESOURCES

— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter



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