Euro's two-week bullish trade ended up with nothing as buyers failed to hold gains above 1.1250 resistance versus the greenback. Several key fundamental reasons stopped the EUR/USD currency from completing the reversal pattern and change the trend's direction last week. Geopolitical tensions, weak economic growth and flight to safety are among them. The European Central Bank released its meeting minutes, while ECB President Mario Draghi hosted a special press conference dedicated to the future of the monetary policy in the region. The upcoming week is supposed to show macroeconomic developments and determine the fate of the currency, while many analysts predict EUR/USD to slide to parity as early as this year.
U.S. President Donald Trump decided to stop threatening the European Union with his new round of import tariffs, shifting the trade war pressure focus to China. That would have helped the European exporters to get fresh air to breathe as U.S. import tariffs would hurt the regional exports capability, adding pressure on local companies in the machinery, industrial and automotive sectors. However, the general fundamental environment and investors' sentiment worsened in the E.U., while Euro dropped to seven-days lows versus the greenback after a failed attempt to recover previous losses.
Although the European economic calendar was not packed with significant macroeconomic events, some figures showed that the economic growth is in danger of sliding to recession as worst-case scenario continued looming. For Instance, the German Gross Domestic Product failed to meet the market consensus of 0.7% growth year-over-year, losing one decimal of the percentage point in the first quarter while the inflationary pressure remained flat. Although French inflation picked up the growth momentum, and E.U. industrial production fell less than expected, the ZEW institute released worse economic projections and consumer sentiment.
German exporters and economists know that the leading European country would not be able to maintain the growth pace without support from China, and the ECB knows that as well. The regulator's last meeting minutes showed that the monetary policy becomes more data-dependent, and some parts of the statement are getting investors ready for softer financial conditions in the Eurozone. In the month ahead, the ECB will publish details of its new TLTRO credit programme which is aimed to replace the quantitative easing programme. However, the main idea remains the same as the central bank will pump additional liquidity into the financial system. In other words, more money will be printed, weakening the single European currency. The fixed-income and borrowing market players would lose attractive advantages of high-yield investments, turning their attention to other regions. Capital outflows would pressure the exchange rate, while borrowings will become more accessible for local corporations. The European Central Bank did not release the potential volume of TLTRO programme yet, and if figures were higher-than-expected, the Euro could crash.
ECB President Mario Draghi is a well-known dove, and his relation to German and French exporters continued fuelling market rumours and talks. Since the world's economy is heading into trade wars and protectionism measures across major regions, Super Mario would not stay out of the currency wars. In his opinion, the only way to withstand the United States in the new world's order is to boost regional economic growth by weakening the local currency. Draghi offers an ultra-soft monetary policy to European corporations in the same way as the Bank of Japan does that for decades. He ignores the fact that the ultra-low level of interest rates does not leave the regulator any room for manoeuvre if things worsened. The snowballing volume of supportive measures might turn into financial turmoil if the worst-case scenario realized for the global economy. Nevertheless, Draghi decides to choose the path of Japan and China, protecting local exporters, and giving them additional competitory advantages in the form of weak Euro, especially in the scope of the U.S. consumption-oriented market.
Despite Draghi's talks about central banks' independence, directed to Trump's attempts to influence the U.S. Federal Reserve's monetary policy, ECB continues playing the role of a currency manipulator. Draghi warned the global financial community that political influence is unacceptable when it comes to central banks and monetary stability. Donald Trump understands what his financial counterparties do when the interest rates go down globally as central banks express frustration about the aggressive geopolitical pressure. Trump wants to eliminate the competitive monetary advantage that was artificially created by the ECB, BoJ and PBoC. His tweets were pressuring on Fed Chair Powell directly, stating that the level of the interest rates must be lowered in the United States, supporting the economic expansion overseas. However, Powell noted that a rate hike is on the table instead of as the economic growth is robust, the labour market is strong, while the inflationary pressure should pick up the growth momentum in the second half of the year. This week's FOMC meeting minutes are supposed to confirm the hawkish rhetoric. If that happened, EUR/USD could get the additional bearish factor.
This Thursday's economic calendar is hot for EUR/USD. European traders will be trying to absorb fundamental events on the other side of the Atlantic and get ready to local crucial data release. Among other reports, Eurozone Manufacturing, Markit Composite and Services Purchase Managers Index could have a considerable impact on the currency pair if the figures failed to meet the market consensus. That potential miss would give the green light for Draghi to launch the TLTRO programme at full capacity, and Euro might fall deep, reaching the parity with the U.S. dollar this year.