Euro Rebounded as Draghi Confident in Higher Inflation

By: Eddy Peng Nov 22, 2017
The euro slightly climbed against the U.S. dollar right after a dramatic loss influenced by failed German talks. The EUR/USD gained roughly 0.05 percent, closing at $1.17374 on Tuesday amid the speaking from the ECB’s President Draghi in Brussels, who is likely to continue his current monetary policy to deal with the current low inflation. There is a robust employment situation in the 19-nation bloc, where it is hitting a record high while joblessness has fallen to the lowest level since 2009. What needs to be mentioned is that the participation rate, which measures how many people are either employed or actively looking for work, has risen 2 percentage points above the pre-crisis level, spurred in particular by higher involvement of women and older people in the workplace, which would suggest a stronger economic performance. However, Draghi has been frustrated by how litter workers have managed to increase their pay, probably due to their basing demands on the low inflation over the past few years, or more concerns about job security. He said falling unemployment will ultimately pick up inflation in the euro region, even if there’s not much sign of that just yet, with no evidence showing that higher employment is followed by increased wage growth, where we can see from the chart below. ACY-Relationship-between-wage-growth-and-number-of-employed-people-221117-2 Euro Rebounded as Draghi Confident in Higher Inflation

Chart 1: Relationship between wage growth and number of employed people

Instead of worrying about weak inflation level, Draghi said they are confident to see that underlying inflation will be eventually driven, showed by evidences that the ECB’s recalibration of its bond-buying program, which monthly asset purchases will be reduced from 60 billion euros to 30 billion euros next year. Overall, the easy monetary policy in the euro-area, including low interest rates, quantitative easing and other measures, will remain for an extended period of time until inflation rates approach a target of 2 percent. Technically, similar with the situation that we have said before, the EUR/USD is still moving in a downward price channel, which started from late August. It retreated after the failed test of breaking the upper channel line, but it seems that the pair wants to attempt again later. The broader outlook for the EUR/USD has been in the support with analysing by Fibonacci retracement, which reveals that it is now bolstered at 1.17304 (23.6% retracement). In the event that it fails to be supported at this level, further decline may occur in the near future. ACY-EURUSD-Daily-221117 Euro Rebounded as Draghi Confident in Higher Inflation

Chart 2: EURUSD Daily

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