Tomorrow in Latvia, the fate of the European currency will be decided. The June meeting of the ECB, which this time will take place in Riga, will be a key event for the euro, as the regulator can actually start the normalization of monetary policy.
However, among experts, disputes still remain about the possible actions of the ECB. Most of them are inclined to the fact that the regulator will nevertheless decide to turn off the QE, and tomorrow Mario Draghi will announce that such a step will be taken this fall. The arguments of this position are obvious. First, the unemployment rate in the euro area dropped to a 10-year low (8.5%). Leaders among the EU countries in this indicator are Germany and the Czech Republic but Greece has traditionally become an outsider. Secondly, the inflation index (1.9%) recovered, surprising the market with a record growth rate. Retail sales in the euro area are weak, but still growing, again demonstrating the positive dynamics. According to some experts, the GDP indicator will also show growth in the second quarter after a decline to 0.4%.
The political situation in Europe also contributes to the tightening of the ECB’s rhetoric. Political crises in Italy and Spain have come to naught, and the threat of new “exits” has passed. This factor will not be considered by the regulator among risk factors.
In general, the market is set for a “hawkish” meeting of the ECB. The reason for such thoughts was the unexpected statement of the chief economist of the Central Bank, Peter Praet, who previously, as a rule, held a “dovish” position, defending the expediency of ultra-soft monetary policy. Last week, he surprised traders by announcing a discussion on the curtailment of the program of buying up debt obligations, “which is scheduled for the end of this year.” After these words, the euro halted the fall, and the yield of treasury securities of the eurozone grew significantly.
However, not all share the optimism of traders about tomorrow’s meeting. A number of currency strategists warn that the European Central Bank may not meet expectations, after which the euro will collapse into several figures. In their opinion, Mario Draghi will not rush and postpone consideration of the QE issue until July. In his usual manner, he can declare that he is satisfied with the current trajectory of inflation, but for a final decision, additional time is needed, during which the Central Bank will make sure of the stability of the dynamics.
In addition, Draghi can focus on the aggravated problem of the trade war between the US and China, as well as between the US and the EU. It should be recalled that Trump did not extend the grace period and activated the new tariffs on imports of steel and aluminum from the EU. Merkel promised to develop new “countermeasures,” while Washington could introduce new duties on foreign cars, thereby exacerbating the trade conflict.
Here, it is worth recalling that Mario Draghi has repeatedly discussed about the risks of trade disputes. Speaking at the end of April, he said that “the main downside risks to the economic forecast are related to external, international factors.” And although the head of the ECB did not voice the name of the US president, he hinted at it transparently enough, pointing to “distinctly expressed risks of protectionism.”
At the moment, the situation in this regard has only worsened – the outcome of the G7 summit eloquently confirmed the existing disagreements. And now, when Trump reinforced his political success with his meeting with Kim Jong-Un, he can take very radical steps in the sphere of foreign trade. The European Central Bank is well aware of the prospects for the development of such a policy, so they can take a timeout on the issue of QE – at least until July 27, when the next meeting of the ECB will occur.
Thus, the June meeting of the European Central Bank is intriguing. Each scenario has its own weighty arguments – the only question is which side the regulator members will take.
In our opinion, the Central Bank will take a “Solomon decision”: on one hand, it will change the QE program, reducing the amount of purchases to 10 billion a month, but on the other hand, it will extend its validity by the end of this year. As an “additional option” Draghi can voice a hawkish rhetoric, expressing optimism about the growth of the European economy. By implementing such a scenario, the head of the ECB will retain the “place possible for maneuver,” without giving up de facto from the completion of QE within this year.
The technical picture of the EUR/USD pair is also showing uncertainty. On the daily chart, there are no clear signals indicating the priority of growth or decline. This suggests that traders took a cautious stance. It is still necessary to take into account the fact that within one day, we will learn the results of key meetings of the Fed and the ECB (such coincidences are rare), so the technical picture of the EUR/USD tomorrow may radically change. Given such a fundamental background, now it is advisable to take a wait-and-see attitude – the risks of unexpected remarks both from the American regulator and the ECB are too great.
The material has been provided by InstaForex Company – www.instaforex.com