EUR/USD: ECB May React To Growing Signs Of Weakness

The euro-zone grew at a pace of 0.4% QoQ in Q1 and also in Q2 2018. Forecasts for the third quarter are positive, and the European Central Bank is cautiously optimistic.

One day before the ECB makes its rate decision and publishes new growth and inflation forecasts, it received a cold reality check. Euro-zone industrial output dropped by 0.8%, below 0.5% that was expected. The relatively small miss in a volatile indicator was ignored by markets, and the EUR/USD continued hugging the 1.1600 level.

However, looking deeper into the data, and the lights begin flashing red. FXStreet expert Joseph Trevisani comments:

The collapse in eurozone industrial production from 5.2% annually in December to -0.1% in July is the steepest and most prolonged in five years and it may well give the ECB second thoughts as it considers the end of its economic support program.

The miss in manufacturing is, therefore, not that new and is becoming a drag. It may have been a result of concerns about global trade, and the situation may be exacerbated if the trade wars escalate. In any case, without the manufacturing motor, mostly coming from the economic locomotive Germany, the economy of the 19-country economic bloc may struggle.

If the malaise in manufacturing continues, it will also weigh on services tied up to it, and it may dampen the growth outlook.

The ECB’s very conditional exit

The ECB is tapering its bond-buying program in October, halving it to €15 billion / month, and ending it altogether in 2019. The Frankfurt-based institution also pledged to keep the interest rate unchanged through the next summer. According to bond markets, there is a high chance of a rate hike in September 2019.

When ECB President Mario Draghi laid out the plans in June, he stressed that the rollout depends on a continuation of the recent trends. This conditionality may come in handy sooner than later. Data such as these may trigger not only lower forecasts but also a pushback in the ECB’s exit plans.