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Are Negative Deposit Rates a Last Resort?

David Becker
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Are Negative Deposit Rates a Last Resort?

The EURUSD extended to a near three-month low of 1.3660 after meeting a fresh wave of selling from the 1.3780 area. The move was a delayed reaction to the Eurozone GDP miss, which did not initially prompt an FX reaction until traders absorbed the releases of national figures out of Italy and Portugal. The price remains distinctly bearish, with there being a lack of substantive rebounds in the wake of ECB-initiated decline that commenced last Thursday.

Eurozone Q1 GDP weaker than expected at 0.2% quarter over quarter, unchanged from Q4 and versus expectations for an acceleration to 0.4% quarter over quarter. Unexpected contractions in Italian and Portuguese GDP and a stagnation in French economic activity already indicated a weaker than expected number. With even Q1 GDP coming in weaker than expected and survey data mixed in April, there are even more arguments for the doves at the ECB, which are pushing for further policy action in June.

Negative interest rates may have unintended consequences, according to council member Mersch, who said negative rates are a tool, but added that they are extreme measures. Mersch earlier tried to rein in inflation expectations by saying that there is no unconditional pre-commitment to a move, although at the same time he added that the central bank is working on a package of measures.

The EURUSD sliced through trend line support, and is poised to test the 1.35 level. Resistance is seen near the 10-day moving average at 1.38. Momentum is negative as the MACD continued to expand and is printing a reading that is negative with a downward sloping trajectory. The RSI is also moving lower with price action which reflects accelerating negative momentum while printing near 32, which is very close to the oversold trigger level of 30.

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