IT may seem obvious for market participants that the ECB is going to stimulate the European economy after the 2-day meeting that ends tomorrow. Still, other countries with developed economies (non-Eurozone members) are afraid that Europe may infect them with the same deflation problems.
Europe’s major problems are high unemployment and low inflation. The rate of unemployment is gradually declining, according to the latest reports. Still, the rate of inflation is not growing to reach the target set by the ECB. This results from weak demand caused by low borrowing in the private sector.
The ECB strives to boost the lending volume but it is hard to achieve since many commercial banks have to expand their balance sheets in order to correspond to the requirements set by the ECB. At the same time, experts assume that a program aimed at the long-term refinancing of commercial banks may fail to bring the desired results, including higher consumer lending.
They say it is much desire to reach this goal through devaluing the common currency.
Mario Draghi, President of the ECB, keeps saying that the Euro is still too strong and hindering inflation economic growth.
A weaker common currency is expected to make European products more competitive, thereby promoting the growth of import prices and decreasing the risk of deflation.
Such a scenario was successfully implemented by the Bank of Japan, which devalued the Yen and pushed the rate of inflation higher to finish off the long period of deflation in Japan.
Still, a weaker Euro will mean that other currencies gain some value against it. Ultimately, the devaluation will lead to deflation processes in other countries. At the same time, it became more and more obvious that Japan is partially responsible for the deflation issue in the Eurozone.
The chart below compares the world's 4 biggest economies: the USA, the Eurozone, the UK and Japan. All the 4 countries have similar monetary policies. Still, Japan is the only country that devalued its national currency quite a lot. The other central banks' achievements are relatively modest.
The chart below indicates consumer prices in the Eurozone and non-Eurozone EU members. The central banks of the countries outside the Eurozone will try to devalue their currencies against rhe Euro to support the relative balance.
EURUSD: Mid-Term Prospects
According to Masterforex-V Academy, the H4 chart of EURUSD is currently giving us a chance to define the near-term prospects in advance of the ECB's decision.
On June 3rd, the mid-term downtrend of EURUSD, which started from the 1,3993 high, suspended after multi-testing the 1,3585 support. The border of the descending MF sloping channel was tested and pinned trough without consolidating at the other side.
According to the rules of the new tech analysis introduced by Masterforex-V Academy, there are 2 likely scenarios:
EURUSD starts rallying within the scope of a bullish reaction or continues the downswing along the mid-term and long-term trends.
If the level of support remains unbeatable , we are likely to see a recovery above the MF sloping channel up to 1,3623, 1,3635 and 1,3649. The scenario is marked blue.
Alternatively, if the MF sloping channel (with probably strong supply) withstands the pressure, the price is likely to resume the downtrend to 1,3585 and 1,3562. The scenario is marked red.
