15.06.201802:33 Forex Analysis & Reviews: ECB stops the bulls

Eurozone

The ECB kept the benchmark rate at the meeting on Thursday at the level of 0%, a decision that was expected by the market and therefore did not lead to an increase in volatility. The deposit and marginal rates were also maintained at previous levels. The record low levels will be kept at least until the summer of 2019, and as for the asset repurchase program, the ECB intends to complete it in December this year, and from October - to reduce the volume of redemption from 30 to 15 billion euros. The extension of the buyout program turned out to be a surprise for the markets, but it fits perfectly into the logic of the economic situation in the eurozone.

Unlike the Fed, the ECB intends to maintain the practice of reinvesting the main payments from the redemption of securities, that is, there is no talk of any measures to reduce the balance.

It is obviously too early to expect aggression from the ECB at the current stage. A further study by ZEW showed that the sentiment index in the German business environment fell to -16.1p, the lowest level since 2012, while the eurozone recorded a drop from +2.4p to -12.6p.

The reasons for the pessimism are well known - the escalation of the trade conflict with the US and concerns about the new government of Italy, whose intentions the markets view as potentially destabilizing to financial markets. In Germany, the data on the industrial sector was rather weak, the figures for exports, production and new orders were below the expectations.

Thus, the economic outlook for the next six months deteriorated significantly. The euro sells off again after a short period of stabilization, and until the end of the week it is likely to drop to 1.1600, provided that Friday's data on consumer inflation for May came out in line with expectations.

Britain

Inflation in the UK is slowing, which reduces the chances of a more aggressive policy from the Bank of England, as the market had expected until recently. The consumer price index, according to published data on Wednesday, increased by 2.4% in May, coinciding with the April result, while experts expected growth of up to 2.5%. The base index also remained unchanged, at the level of 2.1%.

A number of primary indicators, which could have an stimulating effect on inflation, also look weak. The index of retail prices grew less than expected, the housing price index looks weaker, the figures for average wages look worse - in April, the incomes of working people decreased by 0.1%, and now the wage growth rates are lower than in the first half of 2015.

Add the weak GDP growth and high uncertainty associated with Brexit, which worsens the investment climate to understand that BoE has simply has no arguments for rate growth, except for relatively high inflation. Moreover, the "bad" exit scenario may trigger a recession that, if superimposed on high inflation, will lead the country to stagflation - a nightmare for both the government and the Bank of England.

Business is seriously concerned about these prospects, and it's no accident that the European Business Federation BusinessEurope appealed to the British authorities to preserve the current system of EU rules as widely as possible to prevent the creation of "non-tariff barriers", in other words – to fall into the pit of unmanaged protectionism.

The pound in the current conditions should resume its decline,but more aggressive than expected Fed commentary on the meeting were not liked by investors who felt that the regulator contributes to approaching the next wave of the crisis. The dollar looks weaker than expected, and this is the only reason that the pound is holding at the achieved levels.

Until the end of the week, the most likely scenario is to continue trading in the range limited to 1.3300/1.3470 levels.

Oil

The absence of new significant factors prevents oil from reaching the trading range, the situation will not change until the end of the week, Brent, most likely, will remain within 75.50/77.70 dollars per barrel.