EUR Analysis – 21st of April

Although the Euro has remained supported since March 10 with the ECB not looking to ease further for the foreseeable future, general consensus remains that the ECB could cut rates further into negative territory should economic conditions warrant such action. Given that the ECB remain in the midst of an easing cycle and rates are expected to remain at record lows for a considerable time, the EUR remains fundamentally week and is expected to depreciate further over the long run.

EUR Analysis

Interest Rates

Main Refinancing Operations: 0.0%

Last Change: March 10, 2016 (0.05%)

Deposit Facility: -0.40%

Last Change: March 10, 2016 (-0.30%)

Marginal Lending Facility: 0.25%

Last Change: March 10, 2016 (0.30%)

Quantitative Easing: €80 billion per month

Last Change: March 10, 2016 (€60b/mth)

Expected Future Change: On hold

Next Rate Decision: April 21

Inflation

Inflation Target: <2%

Period: Year ending March 31

Final CPI: 0.0% Prior: -0.1%

Final Core CPI: 1.0% Prior: 1.0%

Next Release: April 29

Employment

Month: February

Unemployment Rate: 10.3% Expected: 10.3%

Next Release: April 29

Growth

Period: 2015

Preliminary GDP: 1.6% Expected: 1.5%

Next Release: May 13

On March 10 the ECB announced a huge round of extra easing measures to tackle low inflation in the Eurozone. The package went well beyond the market’s expectations and saw EURUSD fall 170 pips initially. The ECB cut all three interest rates and enhanced existing easing measures; the Main Refinancing Operations rate was cut to 0% from 0.05%; the Deposit Facility rate was cut to -0.40% from -0.30%; the Marginal Lending Facility rate was cut to 0.25% from 0.30%; a new series of 4 Targeted Longer-Term Refinancing Operations (TLTRO), with a maturity of 4 years were announced; the Asset Purchase Programme (APP) was expanded by €20b to €80b per month. The APP will now also include investment grade bonds by non-bank corporations.

The initial reaction to the aggressive new easing measures was downside in the euro however a sharp reversal occurred when Draghi stated that they “don’t anticipate that it will be necessary to cut rates further” and that the ECB “decided against a tiering system so not to signal rates could go as low as ECB wanted”. Following the announcement EURUSD pared all of its initial downside and continued to rally over 200 pips on the day, stalling at the 1.12 handle. The Euro has continued to remain supported throughout March, now hovering around the 1.14 handle, its highest level since October 2015.

The ECB meeting minutes from the March 10 meeting showed that some members saw a need for a sharper rate reduction, however concerns were expressed that a deeper cut to the deposit rate would pressure banks profitability. A negative rate exemption scheme was discussed however was considered to be too complex. Although the minutes continue to show a dovish bias by the ECB with several members stating further easing is possible if needed, the ECB is likely to remain on hold for the foreseeable future, giving the ECB’s most recent policy actions time to take effect.

Revised GDP for the fourth quarter showed the EZ economy grew at a modest quarterly rate of 0.3% at the end of 2015. Annualised GDP printed at 1.6%, above expectations of 1.5% and the prior reading of 1.5%.

One positive aspect for the Eurozone is unemployment which remained unchanged for February at 10.3%. Unemployment has been declining gradually since its highs of 12.2% back in 2013, and is now at its lowest level since August 2011.

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Source:: EUR Analysis – 21st of April

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