19.06.201900:58 Forex Analysis & Reviews: EUR/USD: knockout from Draghi, control shot by ZEW

The euro-dollar pair did not keep the support level of 1.1210 and impulsively dropped to two-week lows, that is, to the level of 1.1182. In this price area, the pair met the opposite resistance of buyers, so the downward dynamics has so far stalled. But if in the near future the price does not return above the target of 1.1210, then the probability of falling to the bottom of the 11th figure will be high - at least from a technical point of view, the pair can go into free fall up to the annual low of 1.1113, without encountering any serious obstacles on its way.

It is noteworthy that the dollar looks uncertain this week: traders are noticeably nervous on the eve of the June Fed meeting, so the demand for the US currency has decreased, especially compared to the end of last week, when the greenback rapidly increased in price throughout the market. Therefore, today's decline in the EUR/USD pair is only due to the single currency's problems. Today, everything is against the euro - both macroeconomic statistics and the rhetoric of the head of the European Central Bank.

So, this morning, Mario Draghi spoke at an economic conference in Portugal. The forum is dedicated to the 20th anniversary of the monetary union, so the head of the ECB expectedly touched on the topic of monetary policy prospects. For the first time in a long time, he allowed the interest rate to fall further into the negative area. According to him, such a step is one of the options for further policy of the ECB. He assured the Forum participants that the regulator would use this tool if the eurozone economy showed a recession and inflation continues to slow down.

He also noted that the central bank is ready to use the entire arsenal of actions available. In particular, we are talking about the bond purchase program (APP) and additional incentives. The head of the ECB acknowledged that many of the early indicators warn of a worsening situation in the eurozone, so the risks to forecasts remain downward. In other words, in order to accelerate inflation to the target level, Draghi is ready to apply all the tools available to the ECB - and, apparently, the regulator will have to resort to such methods in the near future. A colleague of Draghi who spoke yesterday at the same Forum, Benoit Coeure, said that the adoption of such decisions is possible "in the next few months."

It is noteworthy that even US President Donald Trump reacted to today's speech. He accused Draghi of deliberately allowing the euro to fall, thereby increasing the "unfair competitive advantage" of the single currency against the dollar and the United States. "They have been practicing this for years, along with China and other countries," Trump wrote on his Twitter account. Here we should not forget that the US president has repeatedly made the corresponding claims to Europe, whereas in the fall the 6-month period of delay expires on the issue of additional duties on European cars. Therefore, it is possible that in a few months the US president will open the "next front" of the global trade war.

Additional pressure on the euro came from the figures of the ZEW Institute. In particular, the sentiment index in the business environment of Germany fell immediately to the level of -21.1 points - this is the most negative result since last November. Analysts expected a negative trend - according to their forecasts, the indicator should have dropped only to the level of -5.7 points. In Europe as a whole, this indicator also fell to half-year lows, recorded at -20.2 points (with a forecast to decline to -3.6 points). After the April surge of optimism, when for the first time in 2 years, both in Germany and in the EU as a whole, were above zero, this dynamic looks depressing, and this fact had a corresponding impact on the single currency.

European inflation came out at a predictable level today: the consumer price index was not revised downward. But this fact did not support the euro, since de facto at the end of May, the indicators of basic and general inflation slowed down significantly, confirming the ECB's negative forecasts.

Summing up, we can conclude that the representatives of the ECB are preparing the ground for a possible easing of monetary policy at one of the next meetings at a heightened pace. If this scenario comes true, then the euro in this context will lose its advantage over the dollar. Both the Fed and the ECB will follow the path of monetary policy easing, as if returning to the times of 10 years ago. Naturally, everything will depend on the incoming macroeconomic data: in the event that the eurozone key indicators stop falling or show growth, the question of lowering the rate or resuming QE will come to the background. But after such a bright and unequivocal announcement from Draghi, the euro will be under pressure in the near future. A similar "dovish" response from the Fed will be able to provide EUR/USD bulls forces for a corrective rise in the area of the 12th figure.