Date: 11 Jul 2019

The EU Commission reduced its growth and inflation projections for the entire eurozone on Wednesday, leaving the prospect of more monetary policy action from the ECB likely, as downside risks continue to intensify. The European Commission also reduced its overall growth expectations for France, German and Italy for 2020.

Current growth projections for 2019 were left unchanged, although financial markets will surely take note of the weakening EU inflation forecasts for 2020. The EU Commission expects euro area inflation to rise 1.3 percent next year, slightly down from the 1.4 percent previously estimated. The European Central Bank has a clear mandate to keep EU inflation around the two per cent level.

The report included plenty of dovish rhetoric for ECB board members to digest, as it noted that the economic rebound anticipated later in the year now looks weaker, as the global manufacturing cycle has failed to bottom out. Overseas issues were also mentioned in the report, as concerns about the medium-term outlook in China and the recent heightening of geopolitical tensions in the Middle East were highlighted.
Brexit was also mentioned, as disruption from a hard-Brexit could cause long-lasting damage to the European recovery according to the report. The EU Commission noted that on the domestic side, a no-deal Brexit remains a serious major source of risk for EU stability. The report appears to have had no direct effect on the euro currency, as traders and investors largely expect some form of policy action later this year from the ECB.

It now seems unlikely that outgoing ECB President Mario Draghi will implement another round of asset purchases ahead of his departure. The task of adding such dramatic policy measures will most probably be implemented by the newly-announced replacement for President Draghi, former IMF Managing Director, Christine Lagarde.

 

EUR/USD Mountain Chart | Source: ActivTrader

EUR/USD Mountain Chart | Source: ActivTrader

 

The euro has made a solid recovery over the last few trading sessions against the U.S Dollar, following the dovish testimony from Federal Reserve Chair Powell on Wednesday. Bulls need to move price above the 1.1300 level to secure the next round of technical buying in the EUR/USD pair. Key technical resistance is found at the 1.1355 and 1.1410 levels, while downside support is located at the 1.1250 and 1.1220 levels.

 

Written by Nathan Batchelor, External Analyst, ActivTrades

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