The former general manager of the Monetary Fund has taken over one of the warhorses of the outgoing governor Mario Draghi and that is monetary policy is not enough and also the contribution of the policies of the States, which must invest more, is needed. According to Lagarde, monetary policy could reach its target more quickly and with fewer side effects if other policies supported growth alongside it, stressing that a key element is euro area fiscal policy and that investments are a particularly important part of the response to today’s challenges.
In detail, strengthening domestic demand, as countries with current account surpluses can do, can protect jobs when global growth stops. This is because domestic demand is more linked to services that require more work while external demand is more linked to production, which requires less work.
REBALANCING BETWEEN COUNTRIES
For Lagarde, there is also a second advantage in strengthening the domestic economy and that is that this facilitates the rebalancing between the different countries of the Eurozone. Surplus countries tend to grow faster than the world economy during times of global recovery but also to contract more sharply during periods of global recession.
On the interest rate front, the latter amounted to 0% from 2014, the year in which the central bank decided to face the consequences of the 2008 financial crisis; low inflation and limited economic growth.
Beijing reopens to the possibility of an agreement with the United States in relation to the current trade war between the two nations. However, the attitude on the financial markets is still very cautious due to the signs of a slowdown that the US economy has sent in the last period.
After some time of dark about the negotiations, the availability of the leader to an agreement on duties, to which the American president Donald Trump responded, has brought back some optimism. Despite this, both heads of state remained defensive: Xi called for respect and equality and Trump said he was also on the side of the Hong Kong population, struggling with the Chinese motherland.
The last minutes of the October FOMC meeting did not have any surprises. The decision to provide another 25 basis point cut as insurance was motivated by the fact that uncertainty remains and that there were only “timid signs” of a easing of trade tensions.
The FOMC maintains a generally optimistic view of economic prospects, with inflation below the 2% threshold and growth in line with the trend. Members stressed concern over employment growth, probably back after October employment figures, which showed a significant upward revision compared to the previous data.
Analyzing the currencies of the two economic areas (€/ $) we observe how the exchange rate has depreciated by around 12% since April last year, with prices included in a declining channel valid from the end of September. To date, the interest rate differential is still in favor of the US currency. This leads an investor preference to buy $ (with a higher return) than the currency of the old continent.
However, the evident positive divergence of the MACD indicator, which suggests a technical slowdown of the entire downward phase, cannot be overlooked.
In this context, possible price fluctuations in a range between 1.0900 and 1.1200 are not excluded with positive repercussions in the medium-long term (when the idea that euro rates will converge in the positive direction towards those US).
In the event of ascents beyond the 1.12 area (upper part of the aforementioned descending channel) they will send first indications of strength with potential targets set in the 1.14 area in the first instance.
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