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After it had found difficulty to get over 1.3678 resisting level, the single retreated again versus the greenback to be traded currently below 1.36 ahead of the release of April industrial productions of France and Italy.

The pair could rebound from 1.35 area twice last week one following the ECB’s easing package last Thursday and the second following the bullish release of US labor report of May which suggest more tightening steps to come by the Fed.

This divergence persisting between these 2 central banks can lead the direction of this pair in the coming period with no sign of a change yet.

Draghi has said last Thursday that the ECB has not finished yet and it is ready to react and the Fed’s recent minutes have shown discussions about raising the deposit interest rate with maintaining the reinvestment of maturing assets unchanged in the beginning of the tightening cycle and this is in the same time we see the deposit rate at -0.1% in EU.

As the ECB decided last Thursday to lower deposit rate by -0.1% from zero has been introduced since 5th of July 2012 with cutting of the refinancing interest rate by 0.1% to 0.15% for pushing up the inflation and stimulating the economy but without imposing a QE plan.

The ECB has decided to offer other LTRO rounds, despite the knowledge of that it takes longer time to reach the real economy and the ECB has mentioned in more than an opportunity in the first half of 2012 that it waits to see positive effects of the previous taken 2 rounds on the economy, after they could revive the banking during 2012 and the market was waiting too for a greater impact on the economy.

The LTRO has really given the banking sector a way to survive in real critical situation by providing low cost liquidity to fund its operations and sustain its financial position in easier conditions.

But it seemed not effective enough to spur growth as it has been to the banks which have found in it easier credit conditions while they have been in sack of its cheap liquidity to recover and get back the trust of the markets, while the sovereign yields of the EU peripheral countries were at record highs in critical time of the debt crisis.

That’s why the ECB went later in July 2012 to lower the deposit rate definitely to be zero to not pay for what’s more than Eur800b of the banks funds turning over every day at it to open a way to these funds to the economy.

So, the ECB has decided this time to take all possible measures on its mandate to drive the inflation up and spur investment at once avoiding the criticism of the QE and the discussions about the ECB mandates of intersecting in the financial markets or the countries directly by a QE which made the EU recovery lagged behind the pace of UK, US and even Japan which invented this way of stimulation for fighting the deflation which looms to the EU economy.

 

Kind Regards

FX Market Strategist

Walid Salah El Din

Mob: +20 12 2465 9143

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