EUR/USD whipsaws after ECB interest rate decision and weak EU GDP data

The EUR/USD pair whipsawed as the market continued reflected on the ECB interest rate decision and the weak CPI data from the eurozone. The ECB decision came less than 24 hours after the Fed released its monetary policy statement.

ECB interest rate review

The ECB left the deposit facility rate unchanged at -0.50% as was widely expected. The bank also left the marginal lending rate, which offers overnight credit to banks in the eurosystem, unchanged at 0.25%.

In the monetary policy statement, the bank said that the pandemic emergency purchase program (PEPP), would continue “until it judges that the coronavirus crisis phase is over.” This means that the bank could expand the purchases from the current limit of €750 billion. As shown below, these purchases has led to a significant bounce of the ECB balance sheet.

In the statement, the bank said:

“The Governing Council is fully prepared to increase the size of the PEPP and adjust its composition, by as much as necessary and for as long as needed. In any case, it stands ready to adjust all of its instruments as appropriate.”

ECB Balance sheet

This rate decision came a few hours after Eurostat released relatively weakinflation and unemployment numbers and a day after the Fed left rates unchanged. In a statement, the Fed said that it would leave the benchmark interest rate near zero until the economy recovers. In the statement, the bank said:

“The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term,”

In a later press conference, Jerome Powell, lamented that the “economic activity will likely drop at an unprecedented rate in the second quarter.” He also said that the bank was prepared to do more to support the economy.

This rate decision came a few hours after the Bureau of Economic Analysis released sobering Q1 GDP data from the US. The numbers showed that the economy contracted by 4.8% in Q1 and warned that the second quarter could be worse.

Eurozone inflation

Preliminary numbers released earlier by Eurostat showed that consumer prices dropped in April. The headline CPI rose by 0.3%, which was lower than the previous increase of 0.5%. The rate rose at an annualised rate of 0.4%.

Meanwhile, the so-called core CPI rose by 0.8% in April after rising by 1.1% in March. It rose by 0.7% on an annualised basis. Investors watch the core CPI data because it excludes the volatile food and energy products.

According to Eurostat, food, alcohol, and tobacco were the biggest contributors to this inflation. Services and non-energy goods followed closely. On the other hand, energy prices dropped by 9.6% because of the recent price action in the oil market.These numbers came a week after data from Markit showed that manufacturing and services PMI in the region dropped to record lows.

EUR/USD wavers as EU Q1 GDP data disappoint

The ECB interest rate decision also came a few hours after we received preliminary GDP data from the region. The number showed that the bloc’s economy contracted by 3.8% in the first quarter. Analysts polled by Bloomberg expected the economy to slump by 3.2%. This is the worst slowdown in the region since the last financial crisis of 2008/9. The unemployment rate also rose from the previous 7.3% to 7.8%. According to Eurostat:

“These were the sharpest declines observed since time series started in 1995. In March 2020, the final month of the period covered, COVID-19 containment measures began to be widely introduced by Member States. In the fourth quarter of 2019, GDP had grown by 0.1% in the euro area and by 0.2% in the EU.”

As with the United States, analysts expect the decline in Q2 to be worse. A recent report by Capital Economics said that the bloc’s economy would shrink by more than 15% in the second quarter. Another report by Reuters showed that the bloc’s economy would contract by more than 10% in the quarter. This decline is mostly because most countries will spend most of the quarter in lockdown.

Meanwhile, the region’s leaders are still bickering about funding the recovery. A virtual meeting of the leaders ended without a deal. These differences will increase as the north-south conflicts accelerate. The main issues are that some countries prefer issuing low-interest rate debt while others favour grants. They are also disagreeing on the amount of finances each countries should get.

EUR/USD technical outlook

On the two-hour chart, the EUR/USD pair rose to an intraday high of 1.0891 as traders reacted to the slew of information from Europe. The day’s high was along the 61.8% Fibonacci retracement level. At the same time, this price was above the 25-day and 50-day exponential moving average.

I expect the upward trend to continue as bulls attempt to test the 78.6% retracement level of 1.0932. This prediction will be invalidated if the price moves below 1.0856, which is the 50% Fib level.