The ECB is seriously challenged by the problems of European exports and domestic demand. If the dollar has reached its growth peak and such factors as fiscal stimulus and aggressive monetary policy, then why is the EUR/USD falling down? The answer is simple. The euro might not have reached its bottom. The factor of a long pause of the Fed monetary normalization has been priced in the dollar pairs by the markets since the mid-December. A delay in the first ECB interest rate hike from September 2019 to a later period is just beginning to affect the euro value. If the ECB sticks to its former intention to start normalizing its monetary policy by September amid a strong slowdown in the economic growth, the threat of losing investor confidence will skyrocket.
The central banks all over the world are challenged with a serious problem. They lack the means to manage the current drawdown in global economic growth. According to JP Morgan), their interest rates are on average 2% lower than before the global financial crisis. In theory, they should be raised in order to protect the economies from a future recession. The matter is that the tightening of monetary policies may result in a recession. The ECB perfectly knows it. It used to raise the interest rate in 2018 and in 2013. The results were sad in both cases. It might, of course, do the same mistake again and again, but what for?
The troubles of the euro-area economy are not just in lower export rate, hit by trade wars, but in weak domestic demand as well. It might seem strange that the core inflation rate fails to rise higher than 1% amid the growth of average wages and a drop in the unemployment rate. The household debt ratio is down to 57.6%, the lowest since 2006; it gives a clue to the answer. Amid the uncertainty, the Europeans pay off debts and save up; the consumption is weak, negatively affecting the GDP growth. According to Bloomberg, even the strong in 2017-2918 Spain’s economy will lose the growth rate in 2019. Let alone Italy, which, according to the local central bank, is on the verge of a technical recession. It reduced the forecast for Italy’s GDP growth from 1% and 1.1% down to 0.6% and 0.9% in 2019-2020.
GDP Growth In Euro-Area Countries
Source: Bloomberg.
Bank of Italy forecasts
Source: Bloomberg
The budget deficit of 2.4%, suggested by the Euro-skeptic Italian government, seems to be nonsense amid the current dynamics of the GDP rate. Will they frighten the markets by the announcements about Italy’s withdrawal from the EU? According to 80% of Bloomberg experts, the euro, celebrating its 20-year anniversary, will go on at least the same term. Neither Rome nor Athens will be able to ruin it. But, if Germany and France start opposing, the future of the single European currency looks rather gloomy.
Therefore, the skies are getting darker over the EUR/USD bulls, and their opponents are trying to get an advantage of the strong statistics of the U.S. industrial production. Furthermore, New York Fed president John Williams said the U.S. economy would strong in 2019, so the EUR/USD drop is not surprising. The matter is whether the euro will touch the bottom in the range of 1.1265-1.1365.