The ECB Mess with EURUSD Outlook

by on February 12, 2014 5:41 pm BST

The European Central Bank (ECB) has a mess on its hands because it seems to be confused on what or what not to do. The economically troubled bloc of 17 nations has seen a lot of mixed data since officially coming out of recession with the help of Germany and France, which is seeing economic pressures of their own.

Today, there are rumors that ECB official Benoit Coeure is floating around the idea of negative deposit rates. This option was leaked be sources close to the ECB months prior suggesting that President Mario Draghi may use negative deposit rates to help spur lending in the eurozone. Lending has become an issue were even successful businesses cannot borrow money to help grow their economy due to economic and political uncertainty. There has not been a transition to a unified banking union, but fears of capital requirements are causing institutions to hold on to the capital instead of lending it.

The eurozone is facing deflationary pressures, too, with inflation below one percent and well-below the central bank’s two percent target. The ECB must get creative because they are unable to outright purchase assets like the Federal Reserve, and the central bank has been unable to control the euro with talk alone – and inaction does not help the economy. The issue with deflation, or substantially low inflation, is that it would rise the debt burden in inflation-adjusted terms. This will make it more difficult for economically-lagging countries less competitive.

A negative deposit rate could force banks to lend because it would cost money to hold on to the capital, but it is likely the eurozone is struggling from fiscal reform much like the United States. Either walk, the poor economy will eventually force the ECB’s hand to act oppose to flapping their gums.

The EURUSD has been trending within a downward channel, and has been bouncing off the resistance trend line (although it has broken it a few times). The pair is likely to find price action support near 1.3535/40, while deeper support will be located at 1.3490/1.3500. Look for resistance near 1.3645. There has been a +/-DMI bearish crossover, but the ADX is sloping downward and at a faulty reading of 12. EURUSD is likely to remain range bound but likely to trend downward.

1D Chart of EURUSD

1D Chart of EURUSD