Downside risks Diagnosed

The ECB surprised no one yesterday when they decided to keep their current monetary

policy unchanged. However, following that outcome a little later on, the message from

Mario Draghi was clear- the risks to the Eurozone economy have shifted to the downside.

His remarks yesterday followed further statistical evidence from Germany earlier in the

morning with their latest manufacturing PMI data falling below 50- a level, above or below

which defines expansion or contraction.

I touched on the dilemma facing the ECB in my article last Monday and consequently I am

little surprised by the ECB boss’s comments yesterday. Indeed, when one also looks at the

main takeaways from Davos this week; the message is very similar- caution is very much the

watch word.

The list of suspect risks being highlighted are topped by the Chinese slowdown and ongoing trade tensions with the US followed by a similar slowdown in the EU and stalemate on Brexit. Throw in the mounting worries over global growth/debt and corporate leverage and you’ve probably covered the lion’s share of those concerns.

Meanwhile, the rebound in the pound continued with a push through 1.3100 versus the

dollar late yesterday evening. This further lift is being attributed to media reports that the

DUP would back May’s Brexit deal if there was a time limit placed on the ‘backstop’. That

does remain to be seen, but what is clear is that pressure is mounting on Brussels to bend

on this.

The GBPUSD already posted a technically positive close on Wednesday when it ended above its 200 daily moving average for the first time since May last year. A similar rebound in the GBPEUR has also continued to play out when that touched 1.16 overnight.

To better see that please take a look at the chart below of the GBPEUR which has continued

to rise further. Closer to the yellow line I have added on the chart- this is the 200 week

moving average, presently at 1.2080 and beyond the 1.20 mark itself. Looks like the next

technically major resistance level of significant note.

The move higher in the GBPEUR has also been helped by the EURUSD falling through

technical support around 1.1330 and breaching 1.13 yesterday as Draghi highlighted the

‘downside risks’ to the European outlook. I touched on the EURUSD on Monday and the

potential for this to continue to trip over itself, which so far it has done, not yet to any great

degree though.

In regards to those words of caution coming from Davos and the ECB this week; it seems

that looking around for a ‘black swan’ in the middle of the night that might tip things over

the edge may not be the right way to view the current situation. Granted, often there’s a

trigger or catalyst of some sort to set the ball rolling, but it doesn’t have to be that way. It

could just be that we have already reached an inflection point in terms of the global

economic cycle and those highlighted concerns are merely symptomatic of why that might

be the case.

Well, if the mounting consensus diagnosis is correct, and before a second opinion might be required, then it’s now up to the key players on the global stage to take the necessary action. As to whether or not the politicians can come up with a remedy for the diagnosis is as uncertain as the uncertainty itself!