Smoke without fire: The euro grows on
The continued growth of European inflation did not go unnoticed by ECB members. Among the traders, there were rumors that the interest rate could be raised earlier than the market expects. This optimistic message provided support to the euro, and paired with the dollar, the common currency shows character, demonstrating the northern impulse.
It is worth noting that recently, the rhetoric of the members of the ECB has become much tougher, despite the fact that most of them remain cautious approach with a lot of “ifs.” But, considering the situation as a whole, we can conclude that the European regulator is seriously preparing for the process of normalizing monetary and credit policy.
Thus, the head of the Bank of Lithuania and at the same time, the member of the Board of Governors of the European Central Bank, Vitas Vasiliauskas, said that he does not consider it expedient to extend the stimulating program after December of this year. In addition, he expects further growth in core inflation and key macroeconomic indicators. The question of the interest rate, according to Vasiliauskas, can be considered in the autumn of 2019. In general, he positively assessed the current trends, mentioning, however, the risk of the consequences of the trade war.
His colleague Villeroy also acknowledged the “recovery” of the European economy and positively assessed the prospects of this process. Peter Praet, who is the chief economist of the Central Bank, not only joined the optimistic assessments of colleagues but also expressed confidence in the growth of inflation indicators after the completion of QE.
Not surprisingly, against the backdrop of such public rhetoric, “hawkish” rumors were perceived for “pure coin”, as they corresponded to the general outline of events. This is a news article of one of the American news agencies. With reference to unnamed sources, journalists reported that the ECB could raise the rate earlier than the expected date, that is, before the autumn of 2019. As an unnamed source of information said, the market misinterpreted the stated position of the regulator, which stated that the issue of the rate review will be discussed “not before the summer of 2019”. According to the source of the agency, this formulation does not exclude the option of raising the rate in September next year.
Traders did not confuse the anonymity of the published information, which, by the way, somewhat contradicts the public rhetoric of the ECB members. The market sometimes lives with rumors and emotions, especially yesterday, when the States celebrated Independence Day and American trading floors were closed. As a result, the probability of an increase in the rate at the September meeting of the next year rose to 80%, after which the European currency received an excuse for its further recovery.
A similar situation was repeated on the market many times, when traders categorically trusted anonymous information, which, at first glance, harmoniously fit into the overall fundamental picture. There remains only the unanswered question, why did none of the recent members of the ECB even casually allow the option of raising rates before the designated time?
In the opinion of a number of experts, with such information waves, the hawk wing of the regulator verifies the market’s reaction to the implementation of such a scenario. The probability of an increase in the rate in September will gradually increase due to similar anonymous rumors, and not at the expense of public rhetoric of the ECB members. Rumors at any time can be refuted, if there is such a need. But if the fundamental conditions help to tighten monetary policy, the market will be ready for this and protected from “shock therapy”.
Here, it is worth recalling that the cost of a barrel of oil stubbornly goes to around $ 80, so the accelerated rate of inflation in Europe is not excluded. The strengthening of the oil market positively influences the European inflation trends due to rising energy prices.
Thus, the rumors published yesterday are not to be taken as a guide to action. But this information is a good addition to the general fundamental background, especially if Brussels succeeds in preventing a full-fledged trade war with Washington. Let me remind you that earlier this week, the US President met with the Prime Minister of the Netherlands, where they agreed to discuss trade relations between the Alliance and the States. Then, there was another encouraging information: EU representatives intend with the largest carmakers-exporters (in Japan, the US and South Korea) to reduce mutual tariffs and thereby prevent a trade war with America.
I note that at the end of June, Trump officially invited the head of the European Commission Jean-Claude Juncker to the White House to “discuss trade issues.” But the European side is not in a hurry to visit the American president. The fact is that before the end of July in the United States will be released a report on the outcome of the investigation in the vehicle market. The fate of tariffs for European cars depends on the results of this investigation. Brussels has already announced that the visit of Juncker will not take place before the publication of this report (if at all). July 19 will be held a public hearing on these studies, and the final decision of the Commission will, most likely, in the last days of July.
Thus, the European currency has received temporary support, but the long-term vector of currency movement will depend on the outcome of the talks between Washington and Brussels. If the parties can reach a compromise, the single currency will receive a strong impetus for growth. Otherwise, the pressure on the pair EUR / USD will grow, despite the “hawkish” ECB’s intentions.
From the technical point of view, the pair on the daily chart broke through the middle line of the Bollinger Bands indicator, but still remains under the cloud Kumo. The main and the nearest goal of the northern movement is the mark of 1.1745 (the lower boundary of the above cloud on D1).