Tuesday turned out to be rich in events that, if only for a short time but revived the "stagnant" foreign exchange market. First, under the influence of news that China, against the background of serious signals about the deceleration of the national economy, will expand incentive measures, markets have revived, and the demand for risky assets supported exchange rates against the US dollar. But then the speech of the head of the ECB cooled the fervor of market players.
The comment of the ECB Head M. Draghi was unexpected for the market. He said that the slowdown in economic growth in the eurozone countries turned out to be more substantial than he had expected, and that probably a softer monetary policy would be in demand for quite some time.
Against the background of this statement, the euro collapsed in the foreign exchange market, as investors' hopes that the end of incentive measures by the regulator last year would smoothly flow into a process of gradual increase in interest rates did not materialize. It seems that these dreams will not happen. And the main reason for this is the beginning of the general process of slowing down the growth of the world economy after a ten-year period of growth since 2009.
In our opinion, the largest world economies have fallen into the trap they created themselves when they were actively engaged in stimulating national economies, trying to protect themselves from larger economic problems, which could in future also develop into political ones. If the Fed over the past period managed, albeit slightly, but still raising interest rates and reducing its balance sheet, thereby making the groundwork for another possible reduction in rates and incentive measures in the future, the ECB approached the start of a new global recession with negative interest rates and complete lack of ability to maneuver in the impending crisis.
Given such prospects, the eurozone may face the "Japanese" effect when a country's economy falls into a "deflationary pit", that is, a vicious circle of low inflation, which does not allow the economy to grow steadily. Japan, after getting into this process in the 90s, managed to solve problems due to the export of capital abroad, which allowed companies to develop and make a profit, primarily due to cheap labor and low costs of doing business. But now the situation is different. There are practically no such opportunities.
Observing the ongoing processes, we believe that against the background of the realities of the impending recession, the demand for commodity assets, stocks of companies and high-yielding currencies will most likely be observed. It looks like the Japanese yen and the US dollar will be again in value. As for the euro and sterling, they may experience another fall in the wake of the risks associated with Brexit.
Forecast of the day:
The currency pair EUR / USD remains under pressure in the wake of the risk of a recession in the eurozone. If the pair does not grow above the level of 1.1415 against the background of the publication of data on consumer inflation in Germany, it can continue to fall to 1.1345.
The currency pair GBP / USD will retain high volatility amid the uncertainty of the consequences of Brexit. From a technical point of view, if it does not overcome the level of 1.2875, it may fall to 1.2700.
