The single European currency fell against the US dollar for four consecutive months and four of the last five days, but managed to do the main thing – to stay within the trading range of 1.113-1.1265. Despite disappointing statistics on German retail sales (-2% with a forecast of +0.4% m/m) and inflation (+1.4% with a forecast of +1.6% y/y), the bulls managed to counterattack on EUR/USD at the end of spring. Of course, one of the reasons for the growth of the pair was the profit taking on short positions, however, it is possible that the market’s attention switched to the June meeting of the ECB.
The European Central Bank promised to reveal the details of the long-term refinancing program in early summer. The main question – at what rates will the money be provided? Most experts surveyed by Bloomberg believe that under -0.2% and below. However, will this suit borrowers? If we were talking about -2%, then at 1.5% margin, banks would subsidize their customers investing in the real sector of the economy. At the same time, the ECB could afford to raise the rate on deposits, thus attracting new depositors. As a result, LTRO would have a better chance of becoming a more effective program than QE. Neither the American, nor the Japanese, nor the European programs of quantitative easing of special laurels didn’t gain.
Forecasts of interest rates on LTRO
Of course, any hint of the ECB to raise rates can be perceived as a “bullish” signal for the euro. Bloomberg experts expect that the Central Bank will take such a step not earlier than April 2020. If expectations shift to an earlier period, EUR/USD quotes will soar upwards. The governing board needs to be very careful, because it is well aware that the revaluation will block the oxygen and not so bright inflation. The slowdown in consumer prices in Germany in May from 2% to 1.4% y/y indicates that the April surge in CPI was a temporary phenomenon. It seems that the “doves” of the ECB is right: companies absorb rising wages by reducing profits. No one wants to raise prices and lose their market share.
“Bulls” on the euro from this is not easier. In 2018, they entered with optimism, but the US-China trade war almost sent the German economy into recession in the second half of last year. At the beginning of 2019, optimism returned due to the Fed’s desire to make a long pause in the process of normalizing monetary policy and belief in the imminent end of the trade war. Alas, but May made its own adjustments. The mutual exchange of duties between Washington and Beijing returned uncertainty to the markets and worsened the prospects of the export-oriented economy of the currency bloc. It is unlikely until the end of June, when the meeting of Donald Trump and Xi Jinping is to take place at the G20 summit in Japan, the situation will become clearer.
Technically, the inability of the EUR/USD bears to storm support at 1.113 is the first sign of their weakness. In order to seize the initiative, they need to raise the pair’s quotes above 1.12 and 1.1265. As a result, the “expanding wedge” reversal pattern will be activated.