The weaker than expected macroeconomic indicators of most countries are forcing central banks to abandon plans to normalize monetary policy and look for additional measures to stimulate. Currently, the markets do not expect a rate hike in the foreseeable future with a 50% chance of a decline in the next six months.
Following the meeting that ended on Wednesday, the Bank of Canada left the rate at 1.75% but was forced to note a number of negative factors such as faster deceleration of the global economy and lowered the forecast for Canadian GDP for the 1st quarter of 2019 from 0.8% to 0.3% in 2019. In general, the forecast has been reduced from 1.7% to 1.2% and this is against the background of a stable positive trend in oil.
The Bank of Japan also left its support program unchanged based on monitoring the yield curve but worsened its outlook, saying that it would maintain very low-interest rates for an extended period of time, at least until spring 2020. In addition, the Bank of Japan also lowered forecasts for GDP and inflation for 2019 and 2020, which indicates an intention to continue to follow a soft policy.
EUR / USD pair
The Ifo business climate index fell to 99.2p in April, a slight increase a month ago to 99.6 p looks like a one-time correction. At the same time, the indices for assessing the current situation and the index of expectations have decreased.
In general, news coming from Germany looks rather alarming. Production orders fell to their lowest level since the crisis and actual inventory data is very weak. The automotive industry is in decline due to the threat of the introduction of new tariffs from the US while the manufacturing industry is in recession as a whole.
The service sector is still holding up in the positive zone but it will also inevitably follow the production sector amid falling real incomes.
In general, there is a continuation of the negative effect of factors that were previously considered temporary in the eurozone such as news on Brexit, trade war, problems with German automakers, French protests of "yellow vests" and slowdown in China. Even assuming that the peak of the negative impact has already been overcome and the pressure will decrease by the end of the year, the recovery will be weak, as noted by many European institutions, who unanimously review forecasts for eurozone GDP downward growth.
Accordingly, it is impossible to expect a steady growth from inflation since the dynamics of consumer prices directly depend on the growth of real incomes. All of these factors somehow influence the position of the ECB, which loses all reason to raise the rate not only this year but also the next. The ECB will mark the "dovish turn",pointing to the growing risks of a slowdown in the economy, and announced the introduction of two-year target refinancing operations from September 2019.
Mario Draghi also announced the possibility of applying mitigating measures to arrest the side effects of negative interest rates if negative processes in the eurozone economy continue to accumulate. All of these factors in aggregate do not give any reason to count on the growth of rates in the foreseeable future and on the growth of the euro against the dollar.
The powers of Mario Draghi will expire in October, after the launch of the new TLTRO program, and if his successor turns out to be more conservative, the euro will be able to start recovering against the dollar. In the meantime, the situation is developing negatively for the EUR/USD pair and the pressure on the European currency will increase. The breakdown of support at 1.1175/83 strengthened the bearish pressure with the nearest target of 1.1118. Technically, the euro can decline up to 1.07 in the medium term without attempting for a serious correction.
The material has been provided by InstaForex Company - www.instaforex.com