The EUR/USD edged higher on Monday, despite news that the European Investment bank saw a reduction in lending volume due to the Brexit. The ECB’s Constancio sees the need for patience and persistence for the Euro recovery to take hold. The Fed’s Bullard thinks the current rate level is about right while the BOJ remains decisively dovish.
The EUR/USD edged higher trading above support near the 10-day moving average at 1.1632. Resistance is seen near the 50-day moving average at 1.1791. Momentum has turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal. This occurs as the MACD line (the 12-day exponential moving average minus the 26-day exponential moving average) crosses above the MACD signal line (the 9-day exponential moving average of the spread).
The EIB May Face Reduction in Lending Volume
The European Investment Bank may face reduction in lending volume due to Brexit. The President of the European Investment Bank (EIB) Hoyer warned in an interview with Boersen-Zeitung that if other EU member states don’t replace the U.K.’s capital share of 16% the maximum lending capacity of the bank could fall by as much as EUR 100 bln. Hoyer said, however, that a cash infusion is not needed and that it would be sufficient to transfer a small part of the bank reserves will be transferred to equity.
Constancio Says ECB Must Be Patient
Constancio says that the ECB must be patient and persistent, adding that while the Eurozone recovery is broad based, resilient and robust, an “ample degree of monetary stimulus” is still needed. Constancio also repeated that financial stability risks “seem contained” thus rejecting concerns that the persistent low interest environment is fueling imbalances and risks.
Fed’s Bullard Said Rate are About Right
Fed’s Bullard said he thinks the current rate is about right, speaking in a Wharton Business Radio interview. He is concerned the Fed could “send the wrong signal in December by raising the policy rate, and that depresses inflation expectations.” He added, though, that he’s “willing to go with the data, and growth prospects have been better this fall.” Yet he doesn’t expect inflation to be picking up. Meanwhile, data and Fedspeak have the market pricing in a 25 basis points tightening next month. He did note that the regulatory environment is very different under the Trump administration, and that’s given business people more confidence.
BOJ to Remain Dovish
The BOJ’s Kuroda has made it clear that the BOJ will continue to pursue Quantitative and Qualitative Easing (QQE) and Interest Rate Targeting even as the inflation target continues to be pushed out in time. The Bank of England and the Bank of Canada previously raised interest rates but left little doubt in investors’ minds that there is no urgency to do so again in the coming months.
Geopolitical risks weighed on markets last week and huge swings in peripheral long yields highlight that the ECB’s ongoing presence on secondary markets is leaving its mark and in times of weak supply is also likely to add to volatility. Even if net purchases are phased out late next year, the central bank has vowed to continue re-investing bonds that mature and this part of the program will become increasingly important going ahead. Rate hikes are not on the horizon until 2019, but the large number of ECB officials on the speaking circuit this week is likely to once again show that a growing divergence between the hawks and the doves at the ECB with the number of those urging a commitment to an exit to QE on the rise.
Zew Most Important Indicator of the Week
Perhaps the most important indicator for the markets and the overall growth outlook will be the German ZEW readings for November. The markets only a slight improvement in the report as recent nervousness over stock market declines battles with robust growth indicators, although the final outcome may depend on the timing of the survey. Forecasts are for economic sentiment index to inch up to 18.1 after rising 0.6 points to 17.6 in October. The current situation index should rebound to 88.0 after falling 0.9 points to 87.0 previously. Even slightly weaker than expected numbers would still suggest the German economy, in particular, is on course to steam ahead with above potential growth rates this year and next, making the ECB’s monetary policy position looking too expansionary for the Eurozone’s largest economy. These factors aren’t likely to impress the doves, however, who remain focused on still sluggish growth in Italy in particular.
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