ECB Policy

Euro Awaits Dovish Draghi!

In a fiat currency era – currency exchange systems are classified in three categories. A Fixed currency system like AED, Managed floating system like Rupee and Free-floating system like USD, EUR, JPY etc. Theoretically, in a free floating system, Central bank does not intervene in foreign exchange markets and currency fluctuates owing various macro-economic developments. But in reality, major central banks manage their actions (verbal and policy) in a manner, which yield an intended outcome for their currency.

June Policy: Ruthless Fall

Prior to the June monetary policy, the Euro was trading with bullish bias, close to 1.1840, on the expectation hawkish ECB policy outlook. Contrary to market expectation, Mario Draghi maintained the highly dovish view and suggested a very long pause before any interest rate hike. Just to put things in perspective on policy day Euro tumbled nearly 290 pips from a high of 1.1850 to 1.1560. From then EUR/USD has been in the range of 1.1508-1.1798 also 290 pips in nearly 7 weeks. With the benefit of hindsight bias, a lot of market analysts are suggesting that Mario Draghi may have used dovish policy tone to keep Euro gains under check.

Muted Economic Recovery

Europe’s economic data continued to remain sluggish amid looming trade war concerns. Europe’s service PMI index slipped below 55 levels, German ZEW economic sentiment crumbled further into negative territory to -24.6 in July, German retail sales declined sharply by 2.1% in June, month-on-month basis. Only headline CPI inflation able to meet forecast of 2%, supported by a rebound in crude oil prices.

Future Outlook:

Overall, EURUSD is consolidating in contracting triangle formation. The pair can be sold near 1.1740 levels with stop loss above 1.1790 levels and first target of 1.1590 and second target of 1.1500 levels. The bearish view in EUR/USD is further supported by robust economic expansion of US economy, hawkish FED and attractive US treasuries amid trade war concern.

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