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EUR/USD Edges Lower on Latest OECD Global Growth Report

EUR/USD Edges Lower on Latest OECD Global Growth Report

2016-11-28 12:50:00
Nick Cawley, Strategist

Talking Points

- The US and China can help boost global growth from current levels but others need to do some fiscal lifting.

- The EU needs to make “more robust use of fiscal space”

- The UK’s prospects are “considerable weaker” post- Brexit.

Global growth could gather steam through the next two years to around +3.5%, from a current +3% projected pace, according to the latest Global Economic Outlook from the Organization for Economic Cooperation and Development (OECD). The assessment says proposed fiscal policies in the US could increase global growth by +0.1% in 2017 and by +0.3% in 2018, while the fiscal stimulus underway in China is worth +0.2% on average over 2017-18. US growth is set to hit +2.3% in 2017 and +3.0% in 2018, while China will grow by +6.4% and +6.2% over the same timeframes.

Monetary policy is set to diverge in the coming years, according to the OECD assumptions, bolstering the US Dollar further against other major currencies. The OECD expects the US Fed Funds rate to hit its upper bound of 2% by December 2018, while the overnight Japanese interest rate is expected to remain at minus 0.1%. The UK bank rate is expected to remain at 0.25% until the end of 2018 and the in the euro area the main refinancing rate is assumed to be kept at 0% also until the end of 2018.

Other advanced economies, however, still need to push further, according to the report, in an effort to prompt further growth. “A more robust fiscal easing than currently projected in many other advanced economies, including in the EU, would further support domestic and global activity. OECD analysis of fiscal space indicates that the EU has room for more concerted action.” The EU is expected to see growth of 1.6% and 1.7% over the next two years.

Staying in Europe, the UK needs to take additional action after the growth momentum stalled after the Brexit vote in late June. The OECD notes that accommodative monetary policy has limited the impact of the vote, “Uncertainty about the United Kingdom’s relationships with the rest of the world is high, and the risk of exit from the European Union’s single market and customs union has pushed the exchange rate to new lows and lifted long-term interest rates.” UK growth is expected to fall to 1.2% in 2017 and to 1% in 2018.

Chart 1: EUR/USD 30-minute Chart (November 24 to 28, 2016)

EUR/USD Edges Lower on Latest OECD Global Growth Report

The report pushed the EUR/USD lower but the move was muted as traders wait for more pressing data and economic events. A raft of European data is released over the next couple of days, including the latest look at Euro-Zone inflation on Wednesday, while on Friday, November US non-farm payrolls will be closely watched. And at the weekend, the Italian constitutional referendum could undermine the single currency further if PM Matteo Renzi loses the vote, stoking additional uncertainty in the euro area.

Read more: Risks Increasing for Euro Ahead of Italian Constitutional Referendum

--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

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