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EUR/USD rebounds after breaking month-long range

H.S. Borji
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The euro rebounded against its US counterpart Thursday after dipping below 1.23 for the first time in more than two years, as the European Central Bank continued to ponder additional stimulus measures to shore up the struggling Eurozone.

The EURUSD bottomed out at 1.2280 in intraday trade, the pair’s lowest level since July 2012. It would subsequently consolidate at 1.2368, rebounding 0.47 percent. The daily classic pivot point chart shows initial support at 1.2277 and resistance at 1.2334.

The European Central Bank made no changes to its benchmark lending rate on Thursday, as policymakers continued to piece together an appropriate response to the sagging Eurozone economy. With growth in the 19-nation currency bloc stalling, the ECB is facing renewed pressure to prevent the Eurozone from spiraling into another recession.

As expected, the ECB on Thursday left the main refinancing rate at 0.05 percent and the rate on overnight deposits at -0.2 percent.

In a press conference shortly after the rate decision, ECB President Mario Draghi said the central bank would wait until early next year to assess whether additional stimulus is required to reverse the Eurozone’s downward path. The ECB’s Governing Council was unanimous in its commitment to launch whatever stimulus measures were necessary to help the Eurozone recovery. This includes, among other things, a full-scale government bond buying program.

“Early next year the Governing Council will reassess the monetary stimulus achieved, the expansion of the balance sheet and the outlook for price developments,” Draghi said in a press conference.

Draghi also acknowledged that “The risk surrounding the economic outlook for the euro area on the downside,” a sign the ECB will have little choice but to expand its policy measures.

Growth in the euro area stalled in the second quarter and has barely picked up ever since. The Eurozone economy grew just 0.2 percent in the third quarter, with Germany narrowly avoiding recession. The German economy, which accounts for about a third of Eurozone GDP, grew just 0.1 percent in the third quarter. France, the Eurozone’s second-largest economy, expanded 0.3 percent.

Eurostat will post revised third quarter GDP figures on Friday.

Inflation continues to be a chronic issue, trending in the ECB’s “danger zone” of below 1 percent for more than a year. Eurozone inflation edged lower in November, rising just 0.3 percent from a year earlier, the European Union’s statistics agency reported last week. That was down from October’s 0.4 percent annual rate. Inflation in Germany eased to 0.6 percent annually in November, down from 0.8 percent. Germany’s European Union harmonized inflation rate was even lower at 0.5 percent, official data revealed last week.

The ECB expects inflation to average just 0.7 percent next year, down sharply from the September forecast of 1.1 percent and well below the central bank’s target of close to 2 percent. Central bankers also expect growth to remain subdued in 2015. Eurozone GDP is forecast to rise just 1 percent next year, down from the 1.6 percent pace forecast in September.

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