ECB Warns of 12% Economic Fall This Year

<h2>Dire Economic Hit Forecast</h2>
<p>The April ECB meeting, held yesterday, saw the bank adding to the dovish tone of recent G10 central bank messages. The ECB warned that the euro-zone economy could shrink by as much as 12% this year as a result of the economic disruption caused by the COVID-19 crisis. This warning comes on the bank of data released on Thursday which showed the euro-zone economy falling by 3.8% over Q1, the biggest drop on record according to Eurostat.</p>
<p>In response to the deteriorating conditions in the euro-zone, the ECB reassured investors that it will continue to “provide support to affected companies, workers, and households,” through “joint and coordinated policy action to guard against downside risks”</p>
<p>In terms of announcements at the meeting, the ECB published details of adjustments to some of its current measures. Noting the “sharp contraction in economic growth and profound deterioration in the market” ECB chief Lagarde announced a decrease on the interest rate for the bank’s TLTRO III operations. Funding to banks offered through this programme will now have the interest rate reduced “50 basis point below average deposit facility rate” between June 2020 and June 2021.</p>
<h2>New Loans Programme</h2>
<p>Along with the reduction in interest rates here, the ECB also announced that it will begin running new PELTRO operations “to support liquidity in the euro area”. The new pandemic emergency longer term refinancing operations will be launched in May 2020 offering a “liquidity backstop”.</p>
<p>However, away from the technical adjustments made to the bank’s institutional programmes, no other adjustments were made to monetary policy. On interest rates, Lagarde said that rates were expected to “remain at their present level unless inflation outlook converges to level close to but below two percent.”</p>
<p>Lagarde went on to reassure investors that the ECB  “remains fully committed to doing everything necessary with its mandate to support all citizens… “to all parts of the economy, to all jurisdictions in pursuit of our price stability mandate.”</p>
<p>In terms of the outlook, Lagarde repeated the bank’s message that a recovery will begin as soon as lock-down measures are lifted. However, the ECB chief warned that the “speed and scale remain highly uncertain,” and noted that “the medium-term impact of inflation is surrounded by high uncertainty.”</p>
<h2>Market Reaction</h2>
<p>The markets reaction to the meeting was mixed. EUR was lower initially but losses were reversed later in the day. It seems the market was likely looking for more than just technical adjustments to programs. There are now concerns once again about the scope the ECB has to address the situation if there is a further downturn in the economy.</p>
<h2>Technical Views</h2>
<p><strong>EURGBP (Bearish below .8686)</strong></p>
<p>From a technical viewpoint. EURGBP remains supported at the yearly pivot (.8686). With VWAP negative, however, the risks of further losses remain and if price breaks below here, the .8274 level will be the next support zone to watch will be the .8544 region ahead of .85. To the topside, any reversal higher will need to break above the structural highs and yearly R1 at .9097 to gain traction.</p>
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