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Central banks wake up the euro! Are the Fed and the ECB able to get EUR / USD out of somnambulism?


A colorful poster does not necessarily hide a vivid performance that can cause a storm of enthusiasm among theater-goers. It would seem that the presence in the economic calendar of the week of May 1 of such important events as the Fed and the ECB meetings, as well as the release of data on US and European GDP for the first quarter, allow investors to count on serious movements in the EUR / USD pair. In fact, the derivatives market does not expect anything particularly prominent from a bright poster: the demand for options that will bring profit if the euro in the short term is in wider trading ranges than now has decreased significantly; and the relative premium for hedging operations related to the single European currency collapsed to almost zero in the coming week.



The spread dynamics of implied and realized volatility in EUR / USD


Source: Bloomberg.


Nobody expects anything new from the Federal Reserve, but this does not mean at all that he has nothing to say. In March, Jerome Powell spoke about the V-shaped recovery of the US economy, and investors will closely monitor the change in his worldview. The central bank's intention to follow the path of unlimited purchases of treasury and mortgage bonds resulted in an increase in the volume of transactions with treasuries to $ 75 billion per day, but at the end of April the figure dropped to $ 10 billion per day, which is also a very impressive figure and allows us to expect the Fed to increase its balance from current slightly more than $ 6 trillion to $ 8-11 trillion. Markets are worried about the further change in the scale of QE. 


It should be noted that the Federal Reserve, due to a tremendous monetary stimulus, entered the territory it has never been to, and now faces a number of risks. What if individual lending programs do not work? Will the American administration's occasional desire to give directions to the central bank become a habit from time to time? Will the Fed's selective approach to borrowers undermine confidence in the regulator? He mainly provides assistance to large companies that regularly work with capital markets. 


The dynamics of the balance sheets of the Fed and the ECB


Source: Bloomberg.

This is not to say that the ECB has no insomnia. The European regulator faces two challenges that others do not have. One of them is the risk of violating the integrity of the eurozone, the second is the weakness of the banking system of the Old World. The currency block is more dependent on bank lending than, for example, the States, where the bond market is important. 

Both the Fed and the ECB are forced to rescue the coronavirus-affected economies. According to forecasts by Reuters experts, after 6 years of continuous growth in the eurozone GDP in the first quarter will decrease by 3.2%, US GDP - by 4%. Bloomberg estimates the loss of the global economy at 4% at the end of 2020, which is equivalent to $ 6 trillion. European gross domestic product will drop by 8.4%, American - by 6.4%.

In my opinion, withdrawing EUR / USD from somnambulism and the trading range of 1.075-1.09 may, perhaps, be an unexpected expansion of the European QE by € 500-1000 billion. Without it, the main currency pair will continue to look into the mouth of American stock indices and wait for decisions of the Eurogroup about fiscal stimulus.


Source analyst Liteforex


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