The final amount of economic damage from Covid-19 will be probably known in the second quarter of 2020. I think it is necessary condition for the ECB to start to act. For now, wait-and-see stance is more appropriate for the ECB as two key tasks have been solved – the Central Bank stabilized financial markets and, in tandem with the EU government, spurred some highly uneven economic activity. Signs of recovery are well seen in the rebound in consumer inflation in the Eurozone (+ 0.3% in June, 0.1% in May), retail sales in Germany (+ 13.9% in May, forecast 3.9%), consumer confidence indices, which are gradually recover from the zone of depression. Developments in stalling exports sector, especially the state of German automakers, which even without the virus experienced a decline in export orders, are worrying. In this regard, the ECB policy should somehow solve the problem of competitive devaluation of the euro, which should smooth out the decrease in the revenue of exporters in national currency.
What can the ECB do for the euro? I think that after three rounds of bold stimulus, substantial increase of the limit and duration of the key policy tool – PEPP lending program, there are only open mouth operations left. The euro will not be convinced.
Recent data have shown that the Central Bank has no reason to expect some material changes in inflation picture. Although inflationary pressures have appeared in some parts of the economy (primarily in retail, due to support of consumption), in general, the conditions for slowing inflation prevail (rising unemployment, increased risk of default for companies, etc.). Therefore, from this point of view, the ECB has little incentive to tweak its policy.
The ECB is likely to maintain the status quo.
It follows that the likelihood of further weakening of USD against the euro is also high. Recall that USD has not yet fully priced in the risk of a new round of stimulus in the US, the need for which is rising due to moderation of the pace of economic recovery. We learned about this from the hints of several Fed officials. On Tuesday, data on consumer inflation in the US is expected, which will likely indicate a further slowdown, which should also contribute to further retreat of the US currency, as this increases the likelihood of intervention in the economy by the Central Bank and the US government.
Taking into account market expectations regarding the ECB July meeting, which is likely to pass without threats to the euro, there is a high probability of a repeated test of intermediate resistance at the 1.1350 zone and subsequent test of June high in the 1.1400 area. In case of retracement to intermediate support in the zone 1.1260, it may also be worth considering more appealing longs with a target at the June pivot high
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