The European dollar has lost its upward momentum after the opening bell on Monday as investors weigh in Trump policies which may suggest a Fed rate hike soon. Apparently, the recovery of the US dollar changed the tone in the stock market with a high expectation for an inflation increase. The planned expansion of the ECB’s monetary stimulus is now at stake as well after the victory of Trump, according to the central bank’s president Mario Draghi. Will the Euro find its way out of the defensive ground?
Under a volatile economic conditions and low interest rates, the euro slid 0.58 percent in the morning session. After mounting to 1.12740 after the Election Day, EUR/USD dropped to 1.07953 as of 09:09 UTC. The pair had a session high of 1.07999 and a session low of 1.07933 after opening at 1.07946. If the downtrend momentum persists, EUR/USD may find support at 1.07600 and a fall through would create a new support at 1.07575. The pair will likely find resistance at 1.08956 and a breakthrough may result in a new resistance at 1.09182.
The charts above provided the evident downfall of EUR/USD as new hopes for a December rate hike emerged. After the high volatility, which brought significant gains in the euro, the currency started to enter a tight trading range and later surpassed the lower barrier of the band. The pair is currently trading below the 20-day SMA of 1.08298 and the 50-day SMA of 1.08686. Technically, if a currency pair breaks in the moving average, it would mean that the trend is already ending; however, this is not the case for the euro at the moment. Before the market will close, the pair may settle to 1.07788 if the dollar will stay at the offensive track.
Trump and Draghi
Meanwhile, the ECB’s head Mario Draghi warned about the probable complications that Trump’s presidency may bring in the forthcoming monetary stimulus program of the bank. Currently, the Governing council agrees to a monthly asset purchase of €80 billion until the end of March 2017 to bring growth and inflation in the Euro-Zone.
Here are the amended guidelines related to the Eurosystem’s monetary policy implementation provided by the ECB.
- · First, the Eurosystem is introducing some changes to the collateral eligibility criteria and risk control measures with respect to senior unsecured debt instruments issued by credit institutions or investment firms.
- · Second, the Eurosystem is amending the rules on acceptable coupon structures to make certain assets with negative cash flows eligible
- · Third, in the context of asset-backed securities (ABS) loan-level data, the Eurosystem is further clarifying the criteria for a loan-level data repository to become “designated by the Eurosystem” and the application process for designation.
- · Fourth, as a further specification to the collateral eligibility criteria relating to credit claims, as of 1 January 2018 the Eurosystem is explicitly requiring that only those credit claims be mobilised as collateral for Eurosystem credit operations in which the set-off risk has been excluded or significantly mitigated.
- · Fifth, the Eurosystem is updating the haircut schedules for assets used as collateral in monetary policy operations, as detailed in a dedicated press release.
- · Sixth, the Eurosystem is introducing minimum disclosure requirements for covered bond ratings issued by credit rating agencies accepted in the Eurosystem credit assessment framework (ECAF).
- · Seventh, the Eurosystem is clarifying the acceptance criteria for credit rating agencies as External Credit Assessment Institutions in the ECAF (http://www.ecb.europa.eu/press/pr/date/2016/html/pr161103.en.html)
However, the uncertainties over the plan of president-elect Donald Trump in the largest economy in the world may just delay the new stimulus that the ECB has been planning to do in the coming year. The ECB has been vocal in the intention to keep the interest rates at lower levels for an extended period of time. Given that the rates are low, the currency may continue to struggle on the bearish ground. Aside from the unexpected victory of Trump, the Brexit negotiations send negative notion over the stability of the Euro region’s economy and to the market confidence of the investors in the European dollar.
The entire financial market will remain unsteady until Trump reaches the White House in January alongside with other market movements. During these times, it would be too risky to make reforms and or amendments on the monetary framework and to make an important decision such as a rate hike. As the currencies are exposed to possible fluctuations every now and then, the central bank must focus in meeting their respective inflation targets and in securing a more stable economy.
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