Market Analysis

Eurozone recession fears grow ahead of ECB main event

Manufacturing data from the eurozone on Wednesday showed that not only are the growth prospects for the trading block still depressed, but economic activity is actually starting to worsen. Germany’s manufacturing PMI for July slumped to its lowest level in over seven years, while the French manufacturing PMI unexpectedly showed a sharp decline in business activity with a 50.0 reading.

Fears are now growing that the European Central Bank will have to deliver later today with drastic policy action or they start to fall even further behind the curve. The July PMI readings from core EU nations, France and Germany, clearly showed that Europe will continue to suffer the economic consequences from slowing global and Chinese growth unless monetary stimulus is forthcoming.
Trade tariffs have clearly created an environment where EU manufacturing activity is unable to return to growth, which in turn requires policy action from the ECB. The key takeaway from the market’s reaction from yesterday’s worsening EU data is that September or October may be too late if the ECB announce further monetary policy easing later today.

The key downside risk going into today’s meeting is likely to be timing, especially if the ECB reiterates the need to assess the incoming data before implementing QE. ECB policymakers may also be playing the long game, as they hope that Sino-U.S trade dispute will be soon be settled, and EU growth prospects start to pick-up organically without the need for further policy stimulus.
Outgoing ECB President Mario Draghi is well-known for his decisive rhetoric, particularly his bold ‘whatever it takes’ statement, whereby he reassured financial markets of the Governing Council’s commitment to the European monetary project. Bold and decisive statements and immediate policy action may be required later today, or the ECB risks losing credibility and also the ability to fight the battle with low inflation.


EUR/GBP Candle Chart | Source: ActivTrader

EUR/GBP Candle Chart | Source: ActivTrader

The euro has start to reverse against the British pound in anticipation of a weaker euro currency going forward, leaving the EUR/GBP to unravel from the 0.9050 resistance level. Technical analysis is showing that the EUR/GBP could start to test towards the 0.8800 level now that the pair’s 50 and 100-day moving averages have been breached. Key resistance is found at the 0.8960 and 0.8990 levels.


Written by Nathan Batchelor, External Analyst, ActivTrades

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