Lack of Lending Affecting Growth in Eurozone, EURUSD Outlook

by on January 24, 2014 6:44 pm BST

Bank lending in the eurozone is anemic, and the unwillingness of lending to businesses could very well be affected growth within the troubled euro-bloc. At one point a few months ago, the European Central Bank (ECB) President Mario Draghi was debating cutting deposit rates to negative in order to force lending (banks lose money it is holding through the negative return rate).

Sovereign debt yields in the troubled peripheral countries have reached multiyear lows as equity markets reach all-time highs. However, the lack of lending, vise-a-vie growth, and high unemployment strike a different tone underneath equity optimism. It is the optimism that is moving the markets, according to UBS AG Chairman and former Bundesbank President Axel Weber. Weber said, at the World Economic Forum in Davos, “the mood in financial markets may have improved but the economic situation in most European countries will not improve this year.” In relation to this, Spain’s unemployment has nudge upwards, again. The unemployment across the 18-nation union still remains above 12 percent.

Lending gives businesses and entrepreneurs capital that leads to innovation and growth, but banks remain unwilling to lend with so much uncertainty. “There’s still a long way to go from a European point of view in terms of having a banking structure that will stabilize all economies and create growth and create jobs,” said Irish Prime Minister Enda Kenny in Davos.

The 4H chart is showing more downside to come as the infamous squeeze wick returns. The EURUSD shot up over 120 pips on solid PMI data, but there was no follow through as risk is being avoided, currently. Notice a similar wick that pushes up to 1.3892 before selling-off and created a some-300 pip decline.

The sell-off wick is not necessarily indicative to another 300 pip decline, but EURUSD is infamous for these. Currently trading at 1.3677, a move down to 1.3645 and 1.3620 are probable. Although if the pair can catch its balance, a move back up to 1.3700 can happen.

4H Chart of EURUSD

4H Chart of EURUSD