EUR/USD to Remain Subdued for Longer say Commentators Eyeing Little Support from the ECB

 Image © Andrey Popov, Adobe Stock

- ECB interest rates likely to stay low in Europe

- Euro to be kept under pressure as a result

- Technical rebound likely only temporary

The Euro may have rebounded during recent sessions but the outlook from a fundamental perspective remains decidedly uninspiring as the European Central Bank (ECB) appears to jettison its previous plan to withdraw the crutch of crisis-era easing. 

The Euro has climbed back up to 1.1300 against the U.S. Dollar over recent sessions, having made new yearly lows in the 1.11s, but the main problem for those hoping for a sustained rebound remains the persistently low core inflation rate and economic growth in the Eurozone.

“After years of stimulus, years of negative interest rates, that we are still in a conundrum on growth is a bit puzzling,” says Jean Raby, CEO of Natixis Investment Managers. “The downgrade of growth from 1.7% to 1.1% in 2019 is kind of an eye-opening, that said, it may simply mean, we will be in a growth environment that is going to be slower in Europe, for longer, and right now, I think, most market observers do not expect any start of normalisation of interest rate policy in 2019.”

Interest rate policy matters as the promise for higher interest rates at a central bank in the future tends to support a currency, while expectations for unchanged, or lower rates, tends to weigh on a currency.

The Euro was seen under pressure last week as the ECB confirmed it would no longer raise interest rates in the Autumn of 2019 and would prefer a delay to last until at least year-end.

Economists at the Frankfurt-based institution meanwhile revealed a series of swingeing cuts to inflation and economic growth forecasts.

Mike Amey, portfolio director and head of ESG at PIMCO says core inflation has remained stubbornly low for too long, and as a result, “it is going to be very hard for the ECB to go through any kind of rate cycle.”

Without higher interest rates it is difficult to see where the impetus for a rally in the Euro might come from.

“We have always been sceptical that the Europeans were going to get much lift off on interest rates,” says Amey in an interview with Bloomberg News. “The European data has slowed down, but crucially and the one we have generally focused on, for a long time - a lot longer than the last two weeks - has been the inability of Europe to get inflation up to towards the target sustainably,” says Amey.

Whilst headline inflation has see-sawed from low to relatively high levels above or close to the target level at or just below 2.0%, the more representative core inflation rate, which leaves out volatile food and fuel components has remained stuck at around 1.0%.

“If you look at what has been going on for years, with core inflation rates, they have been stubbornly low and that creates a problem for the ECB,” says Amey.

How far can the Euro's Near-term Rebound Go?

The broadly negative outlook for the Euro on the fundamental front dovetails with some current near-term bearish technical assessments of EUR/USD, which view the recent fierce rebound as merely a temporary respite from the longer-term downtrend.

“As the Dollar has slipped a touch in recent sessions (broadly since the payrolls report), the Euro has also managed to stabilise and this is helping to pull a rebound on EUR/USD. The question is whether it is a retracement move into overhead supply which houses a whole bunch of sellers, or as part of a medium term range with last week’s downside break being false,” says Richard Perry, a market analyst at FX broker Hantec Markets.

Perry’s conclusion is that the rebound isn't likely to stick and the pair is destined to continue lower eventually.

Of central importance is how the exchange rate reacts to the important 1.1300 level. If it meets rejection at 1.1300 and collapses back down that will be a sign of a bearish resumption, if, on the other hand, it can somehow break clearly above 1.1300 an overly pessimistic outlook may be unwarranted.

“Yesterday’s first look at $1.1300 was rejected into the close and the market is again trading just shy of $1.1300 this morning. Momentum indicators are edging higher tentatively as the market has picked up in the past few sessions. But is this a sustainable rebound? It still looks to be an unwind in a bear phase on RSI and MACD,” says Perry.

A break below the 1.1175 level would probably be critical in reasserting the bearish case in this sense.

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