Article by ForexTime

The Euro is trading in a tight range ahead of the Jackson Hole Speech today by Janet Yellen and Mario Draghi.  Pressure on Draghi is rising again ahead of his speech. Weak growth data, the threat that the conflict with Russia will derail the German and Eurozone economy and ongoing weak inflation numbers have revived pressure on Draghi to start broad based asset purchases.

A weaker Euro would help the Eurozone increase exports, but it will likely take a full-blown QE program to accomplish this feet. Eurozone peripheral yields are already heading for new lows, amid hopes of ECB buying as the risk of deflation and a de-anchoring of inflation expectations, continue to perpetuate. Draghi will have to acknowledge the weakened growth outlook as September ECB projections are likely to look weaker again, but with the TLTRO program still to start and there is little expectations of any additional measures for now.

The TLTRO program will target lending from banks, but this is rollover and does not provide huge liquidity which is what the EU needs. The risk is that the downturn in confidence amid concerns about the impact of geo-political tensions will be turning into a self-fulfilling prophecy that could threaten the still fragile Eurozone economy. Second quarter GDP numbers may have been weighed down by special factors, including the very mild winter, but confidence indicators for July and August and not suggesting a material improvement ahead.

For now the data remains consistent with the ECB’s target of modest growth, but downside risks have clearly increased considerably. Much will depend on the length of the tensions and whether more sanctions are too follow and uncertainty about the outlook is very high. The longer the tensions continue, the more confidence will be affected and with inflation still remaining low, the pressure on Draghi to do even more to support the recovery is likely to increase again, even if our main scenario for now remains for steady policy for the near future.

The currency pair EUR/USD is trading below the November lows of 1.3295, with a target support level of 1.31, which coincides with the September lows.  Momentum is negative after the MACD (moving average convergence divergence) index generated a sell signal.  The RSI is printing at 30, which coincides with the oversold trigger level.

Article by ForexTime

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