There is definitely something that cannot be hidden, the current European crisis is deeper than expected. Few facts, overall unemployment rate in many countries is just increasing and debt amounts do not seem sustainable for most of them over the long haul. Until now, Germany, the European flagship, seemed to be the single beneficiary of the European Union. Indeed, it was the only country to be able to reduce its debt and to see its competitiveness increasing. This Europe was tailor-made for it. Behind this picture, recent German data confirms it is not any more an exception. Factory orders have declined for the second consecutive month in January printing at -0.1% m/m. Yet, December data has been revised up to -0.2% m/m. Concerns are even growing that Germany is not very satisfied with current European monetary policies.
It is clear that the European Central Bank is sending a wrong signal by using same monetary policies used in the U.S. and in Japan over the last decade with no satisfying results. At last ECB meeting, on March 10, the consensus was resoundingly clear and the ECB has not disappointed financial markets by boosting the pace of the QE by €20 billion to €80 billion. The deposit rate has been lowered to -0.4% from -0.3% while the refinancing rate has been sent to 0%.
It is important to remember that downside pressure on the EURUSD is fading as markets start to question the true nature of the monetary policy divergence. The Fed is definitely struggling to hike rates and for the first time negative interest rate have been discussed. However, as we know this is not an option as Euro competitiveness would take the biggest hit in the event that markets further price in no rate hike this year. European inflation forecasts has been slashed to 0.1% from 1% for 2016, which is far from the ECB inflation target of 2%, while growth projection has been cut to 1.4% from 1.7% due to continued global uncertainties and weaker global demand. Mario Draghi has fired the big bazooka. He gave even more than what the market expected. Yet, we are afraid it will not be sufficient in the short-term. After years of QEs, U.S. and Japan’s inflation are stalling around 0. So, what to expect from the ECB ? Definitely not more than what is happening overseas.