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A Lower Euro is encouraged by the ECB

David Becker
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www.iforex.com

Following last week’s comments from ECB President Mario Draghi on a potential change of monetary policy in June, ECB officials have been discussing the need for easier policy in an effort to talk down the Euro. A softer currency would increase inflation expectations as well as help the periphery to become more export competitive.

Even if the ECB is going to do something, it is not clear precisely what it is going to do. Draghi is among the first to point out that the central bank has a wide range of options. They range from the more conventional cut in the refinance rate or a cut in the lending rate, to the somewhat less conventional cessation of sterilizing SMP purchases.

The Bank of France business confidence index declined to 98 in April from 99 in March, with the production outlook for May falling to 1, from 3 in April and versus 5 in March. Capacity utilization still picked up in April, but the drop in the production outlook and the decline in order levels in April suggest a slowdown ahead.

Confidence in the services sector meanwhile stayed steady in April, with the overall sentiment indicator unchanged at 94. Expected activity levels for May rose to 4 from 2 in April, so signs of ongoing improvement. Still, the weakened business sentiment number will add to concerns about the stability of the recovery.

The EURUSD tumbled last week below trend line resistance created by an upward sloping trend line that connects the lows in February to the low in April and comes in at 1.3780. The next level of target support is 1.3680. Momentum is negative as the MACD (moving average convergence divergence) index generated a sell signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses below the 9-day moving average of the spread.

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