EU Summit and the single currency

By David Morrison  |  27/06/2018 15:23

Concerns that EU member states will fail to reach substantive agreement over immigration policies

Draghi delaying first rate hike despite stimulus wind-down

The euro continues to struggle following its slump two weeks ago after the last European Central Bank (ECB) monetary policy meeting. Ahead of the meeting the EURUSD appeared to be making a solid recovery after a sell-off which saw the pair lose 7% between mid-April and the end of May. But while the ECB finally produced a timetable for winding down its Asset Purchase Programme (which currently involves buying €30 billion worth of Euro zone bonds each month), its president, Mario Draghi, sounded dovish during his subsequent press conference. Mr Draghi indicated that there would be no rate rise until well after next summer, pushing back on expectations of a miniscule 0.10% hike in June 2019. He also said that the removal of monetary stimulus was contingent on the ongoing pick-up in Euro zone inflation being sustainable. The single currency sold off sharply and has so far failed to recover much lost ground. Then yesterday ECB official Peter Praet insisted that the central bank will maintain its zero-interest rate policy “as long as necessary to ensure that inflation developments remain in line with current expectations of a sustained adjustment path”.

Fed tightening

Of course, the EURUSD hasn’t been helped by news that the US Federal Reserve is expected to hike rates another two times before the year-end, raising the fed funds target band to 2.25-2.50%. Nor does the current sluggishness of economic growth across the Euro zone and Trump’s tariff threat inspire much confidence in the single currency. But the euro has other issues to deal with as well, not least a new Eurosceptic Italian government and a fierce argument between EU member states over current immigration policies, both of which are helping to push the UK’s withdrawal from the EU onto the back-burner.

Migration concerns

Asylum and migration are set to be the hot topics at the EU summit which begins on Thursday. It is not just the new Italian government which is pushing back against the current EU policy on immigration. Others include Poland, Hungary, Austria and the Czech Republic. But perhaps most crucially German Chancellor Angela Merkel’s government is at risk of collapsing because of a fall-out with her coalition partner, the Christian Social Union (CSU). The CSU hold sway in Bavaria and, ahead of regional elections in October, are under threat from the far-right AfD. CSU leader and Germany’s Interior Minister Horst Seehofer is pushing Merkel to enact tougher asylum rules at Germany’s borders. If the Chancellor fails to return from the summit with an ‘acceptable’ strategy on immigration, Mr Seehofer has threatened to act unilaterally. This would involve turning away from Germany’s southern border people who have sought asylum elsewhere in the EU. Such an act would pressure Merkel to sack him and so break the coalition. So, this is shaping up to be an important summit and one which will be difficult to fudge with the usual platitudes.

Technical picture

As far as the EURUSD chart is concerned, watch for a retest of support just above 1.1500. This marks the 50% retracement of the rally from March 2017 to May this year and was tested and rejected twice over the last month. A break below here could see the pair pull back to below 1.1300 which marks the 61.8% Fibonacci Retracement of the same rally. To the upside there’s mild resistance around 1.1800 and significant resistance around 1.2050. A bounce up to here would have traders watching for the possible completion of a large head and shoulders pattern from last summer.
 
 
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