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EUR / USD: the recipe for "survival" of the euro

At the end of last year, the head of the European regulator warned that the EU economy would gradually slow down, given the dynamics of leading indicators and he was not mistaken. The key countries of the European Union published depressing data in early January.

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First of all, the data on inflation in Germany was a disappointment. On a monthly basis, the consumer price index dropped to -0.8% for the first time since January 2018, falling to the negative area and 1.4% in annual terms. The negative trend for the third month in a row continues. Retail sales in Germany also set an anti-record, the indicator collapsed immediately to -4.3% on a monthly basis with a decline forecast to -0.5%.

The release data on the growth of European GDP was at the level of forecasts, confirming the slowdown in the European economy to 1.2% in annual terms. Another disappointment with the Italian economy showing a negative result in December. The index of Italian GDP is below zero for the second month in a row - in other words, the third largest eurozone economy has entered a stage of technical recession. Moreover, the Italian Prime Minister predicted a decline in GDP during the first two quarters of the current year.

In the quintessence of the current situation is today's release of data on the growth of European inflation. The consumer price index has expectedly slowed to 1.4%, falling for the third consecutive month. Last October, this indicator was at the level of 2.2%, but then this index began to follow the oil market, which also began to rapidly lose in price since mid-autumn. By the way, the core inflation today has pleasantly surprised the EUR/USD bulls and most experts expected to see this indicator at one percent level, but in the end, it turned out to be slightly higher - at around 1.1%. However, this is not a reason for any excessive optimism as the core index of inflation has been in the range of 0.9% -1.1% since May last year. Hence, today's figures can only please us by not exceeding its lower bounds.

All of these suggest that the European Central Bank is very likely to take a waiting position this year, thereby depriving the single currency of an important trump card, even representatives of the "hawk" camp of the ECB recognize this fact. In this context, yesterday's speech by the head of the Bundesbank, Jens Weidmann, who has consistently defended the idea of a return to a tight monetary policy, was instructive. However, he has somewhat softened his position today. He said that the growth of the German economy this year will be even lower than the revised forecasts.

Let me remind you that this week, the German Ministry of Economics reported that they are reducing their forecast for the growth of the national economy this year to 1%. But the real result in Weidmann's opinion, will be even below weak forecasts. At the same time, he acknowledged that the fact of a slowdown in Europe's largest economy will serve as a "deterrent" for the ECB in the context of a decision on interest rates. Earlier, a similar position was expressed by two more members of the governing council of the European regulator.

Given the above disposition, a logical question arises: why is the EUR/USD pair so steadfastly keeping in the area of the 14th figure without leaving the price range of 1.1380-1.1490? In my opinion, such a dynamic is initially because of the general weakness of the dollar and secondly, in hope for a truce between the US and China. These factors correspond to each other but they affect the EUR/USD pair differently. In particular, the dovish attitude of the Fed eliminates the negative effect of European statistics, supporting the pair in a given range.

However, the success of the US-China negotiations is pushing the pair up. True, lately there is less and less good news in this aspect: the "Huawei case" and the new requirements of Donald Trump reduced the likelihood of a broad deal in the near future. For this reason, the EUR/USD pair showed a southern momentum yesterday, rolling away from local maxima but today the situation has somewhat changed. Chinese President Xi Jinping said that he was ready to continue negotiations with President Trump, despite all the surrounding circumstances (the next round of negotiations will take place in mid-February). The euro's reaction is coming not long and once again demonstrates a "hawkish" attitude, despite the decline in the German economy and pan-European inflation figures.

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Thus, traders of the euro-dollar pair are now focusing more on US events and the external fundamental picture, primarily in the context of the prospects for the negotiation process between Beijing and Washington. Therefore, today's northern impulse of EUR/USD pair may continue if American nonfarm disappoint the market. In this case, the dollar index will again go to the bottom of local minima, and the euro major pair will be able to test the 15th figure again.

The material has been provided by InstaForex Company - www.instaforex.com