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Euro Forecast to Reverse Gains if German or Eurozone Inflation Disappoint

Last week’s high: €1.1502

Last week’s low: €1.1316

Euro Exchange Rates Leap after ECB Prove Optimistic on Inflation Outlook

The Euro surged higher across the board in the wake of Thursday’s European Central Bank (ECB) policy decision, even though there was no policy change at this stage.

Comments from ECB President Mario Draghi proved particularly encouraging to EUR exchange rates, as he sounded a more optimistic note on the subject of inflation.

This naturally gave rise to speculation that the ECB could return to a monetary tightening bias sooner rather than later, particularly in the wake of other strong domestic data.

As a result the GBP/EUR exchange rate slumped sharply, even as bets on the prospect of an imminent Bank of England (BoE) interest rate hike also picked up.

The relative weakness of the US Dollar also benefitted the Euro, with US Treasury secretary Steven Mnuchin indicating a preference for weaker USD exchange rates.

Further encouragement was in store for EUR exchange rates as the latest ECB survey of professional forecasters also pointed towards a greater pick-up in inflation over the coming years.

Euro Outlook: Disappointing Eurozone Inflation May Weigh Heavily on EUR Rates

EUR exchange rates may struggle to maintain a bullish run in the coming week, with a number of high-impact data releases set for publication.

Particularly in focus will be January’s German and Eurozone consumer price indexes, which will offer a fresh picture of the state of domestic inflation.

Any uptick here could fuel additional Euro demand, increasing the pressure on the ECB to take a more hawkish policy stance.

On the other hand, if price pressures fail to mount this is likely to offer the GBP/EUR exchange rate a rallying point.

Further volatility is expected on the back of the fourth quarter Eurozone gross domestic product (GDP) and January’s German unemployment rate.

So long as the currency union continues to demonstrate signs of robust growth, the downside potential of the Euro is likely to be limited.

Key Events

30 January

10:00   Eurozone Gross Domestic Product

13:00   German Consumer Price Index

31 January

08:55   German Unemployment Rate

10:00   Eurozone Consumer Price Index

1 February

09:00   Eurozone Manufacturing PMI

 

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To keep up to date with the Euro, visit the Euro blog in our Currency News section.

 

 

David Worthington

Currency Trader

T: (0)1442 892 079

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