Euro Facing a Resistance When Draghi Sees Solid Recovery
By: Eddy Peng Apr 28, 2017
Chart 1: EURUSD Daily
Draghi held Press Conference yesterday showed rising enthusiasm about the state of the euro-area economy, while he also concerned about weak inflationary pressures. “It’s true that growth is improving, things are going better,” he told reporters in Frankfurt on Thursday after the Governing Council agreed to keep its stimulus settings unchanged. “In 2016 we were speaking of a fragile and uneven recovery. Now it’s solid and broad.” Euro-area economic data, including ECB marginal lending facility, deposit facility rate and German consumer price index which were released yesterday, have demonstrated increasing resilience in recent months, prompting ECB officials to publicly debate when they might start to wind down asset purchases and raise interest rates. “The risks surrounding the euro-area growth outlook, while moving towards a more balanced configuration, are still titled to the downside,” he said. “Underlying inflation pressures continue to remain subdued and have yet to show a convincing upward trend.” Concerns about political risks have dominated much of the year so far. With the likelihood of centrist Emmanuel Macron defeating anti-EU candidate Marine Le Pen in the final round of France’s presidential election, risks such as Italy’s political limbo and the U.K.’s Brexit negotiations could still weaken the euro. Economists forecast that the first hints of an exit from extraordinary stimulus may come by June 8, when the Governing Council next announces policy and publishes projections on the economic outlook. Regarding prospects of U.S. economy, Trump’s tax plan released Wednesday by top economic adviser Gary Cohn and Treasury Secretary Steven Mnuchin. Although cutting corporate tax from 35 percent to 15 percent could dramatically fuel enthusiasm and innovation in the future economic development, it’s still unclear whether or how the tax proposal would be paid for. By answering this question, Mnuchin noted that economic growth benefiting from tax cuts would cover much of the cost, but it’s questioned by economists. If the legislation cannot be revenue neutral in the long run, its tax cuts would have to be temporary. Looking at the daily movement of U.S. dollar index, we found that it’s likely to be supported by 200-day moving average even if it’s not confirmed. The convergence of trendlines tends to trigger potential breakout in a few weeks.
Chart 2: USD Index Daily
