Europe of defeated populism. Fundamental analysis for 26.05.2014
26.05.2014
For the first time the ECB President Mario Draghi acknowledged the existence of the arrival of deflation risks, but with the caveat that it is possible only under certain adverse scenarios. Earlier, at almost every press conference Draghi denied such risks, pointing out the positive aspects of low inflation, and saying that for consumers the absence of sharp fluctuations in prices is a good thing, especially in the absence of revenue growth.
Speaking at an ECB forum in Portugal, Draghi did not rule out the possibility of starting asset purchases, if inflation is stuck at low levels "for too long." Despite the rather vague wording on the time period, the ECB is likely to really start working on the situation with the European version of quantitative easing. It seems that in times of crisis such a program is desperately needed.
Previously, many economists have pointed out the increased risk of a "deflationary spiral" in the euro zone. The point here is that when prices fall, the consumers and the companies begin to hold back their spending in hopes of getting the best price. As a result, the demand decreases, the price moves further down, and everyone is waiting for further reduction, supporting the "vicious cycle" of deflation, which is quite difficult to break.
Such developments aggravate the problems of debt holders, especially if it is government debt. A decline in prices and the expectation of an even greater fall from the customers leads to a reduction in tax revenues. Consequently, if the distressed euro zone countries are considered, the reduction of the debt burden can not be considered. If the recession will resume, then the debts once again start to rise in volume and that is unlikely to please the investors.
Amid the statements from Mario Draghi, in Europe the parliamentary elections are being summarized, which were marked by a significant strengthening of the position of radical parties. For example, in France, the largest number of votes went to the National Front, in Belgium the radical Flemish party seized leadership, the populist Danish People's Party also holds the first place with about a quarter of the votes.
Approximately the same support was for the Coalition of the Radical Left forces (SYRIZA) in Greece, which ensured its first place in the election. Moreover, the neo-Nazi party "Golden Dawn" was able to collect about 10% of the vote, which generally could undermine the government's position. If current trends continue, the centrifugal forces in the EU will only gain momentum and that hardly contributes to an economic recovery after the crisis.
I continue to hold the transactions to sell; the news background is unlikely to show any deep correction of the euro. As it is a day off in the United States (the country celebrates Memorial Day), it is unlikely that we will see any significant movement in the market. Meanwhile, on Tuesday, a new piece of rhetoric is expected from Mario Draghi, which can move the market to lower price levels.
RoboForex Analytical Department
Speaking at an ECB forum in Portugal, Draghi did not rule out the possibility of starting asset purchases, if inflation is stuck at low levels "for too long." Despite the rather vague wording on the time period, the ECB is likely to really start working on the situation with the European version of quantitative easing. It seems that in times of crisis such a program is desperately needed.
Previously, many economists have pointed out the increased risk of a "deflationary spiral" in the euro zone. The point here is that when prices fall, the consumers and the companies begin to hold back their spending in hopes of getting the best price. As a result, the demand decreases, the price moves further down, and everyone is waiting for further reduction, supporting the "vicious cycle" of deflation, which is quite difficult to break.
Such developments aggravate the problems of debt holders, especially if it is government debt. A decline in prices and the expectation of an even greater fall from the customers leads to a reduction in tax revenues. Consequently, if the distressed euro zone countries are considered, the reduction of the debt burden can not be considered. If the recession will resume, then the debts once again start to rise in volume and that is unlikely to please the investors.
Amid the statements from Mario Draghi, in Europe the parliamentary elections are being summarized, which were marked by a significant strengthening of the position of radical parties. For example, in France, the largest number of votes went to the National Front, in Belgium the radical Flemish party seized leadership, the populist Danish People's Party also holds the first place with about a quarter of the votes.
Approximately the same support was for the Coalition of the Radical Left forces (SYRIZA) in Greece, which ensured its first place in the election. Moreover, the neo-Nazi party "Golden Dawn" was able to collect about 10% of the vote, which generally could undermine the government's position. If current trends continue, the centrifugal forces in the EU will only gain momentum and that hardly contributes to an economic recovery after the crisis.
I continue to hold the transactions to sell; the news background is unlikely to show any deep correction of the euro. As it is a day off in the United States (the country celebrates Memorial Day), it is unlikely that we will see any significant movement in the market. Meanwhile, on Tuesday, a new piece of rhetoric is expected from Mario Draghi, which can move the market to lower price levels.
RoboForex Analytical Department
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Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex bears no responsibility for trading results based on trading recommendations described in these analytical reviews.