Concerns that Eurozone inflation woes would push the European Central Bank into introducing negative interest rates kept the Euro under pressure over the weekend.
As highlighted by forex strategists Peter Schaffrick and James Ashley, ‘The ECB Governing Council under President Draghi’s tutelage has shown a remarkable alacrity for acting sooner rather than later. Consequently, there has to be a considerable risk that the rate cut we have in place for March instead comes as soon as this Thursday.’
However, while the common currency was struggling against peers like the US and Australian Dollars, the Euro was able to retain gains against a softer Pound.
As European trading got underway on Monday the Euro rallied against its rivals as domestic PMI reports surprised to the upside.
The Euro was boosted by the news that German manufacturing PMI advanced to 56.5 in January, slightly beating previous estimates, while Eurozone manufacturing PMI hit a 32-month high of 54.0 in the first month of 2014.
In a statement published with the figures, Markit economist Chris Williamson observed; ‘The Eurozone manufacturing recovery gained significant further momentum in January […] The improving economic picture painted by the PMI, which is running at a level consistent with Euro area GDP growth of 0.4-0.5 per cent for the first quarter, takes the pressure off ECB policymakers to add more stimulus’.
However, Williamson did add; ‘Price pressures, and the threat of deflation, will no doubt remain a key concern for the ECB, especially as growth of both input costs and selling prices eased in January.’
After the data was released the Euro moved away from a two-month low against the US Dollar and consolidated gains against the Pound.
We forecast that the Euro could enjoy a bullish relationship with its peers as the week progresses.
If Wednesday’s services PMI figures for the Eurozone and the currency bloc’s retail sales report add to the case for the ECB refraining from altering stimulus when it meets on Thursday the Euro will be lifted.
Although comments issued by the ECB regarding its readiness to act if the need arises could weigh on the Euro for the second half of the week, any Euro losses will be limited by the central bank’s opting to leave stimulus unaltered.
Furthermore, today’s slightly disappointing manufacturing report for the UK dimmed the Pound’s appeal and the prospect of lacklustre services and construction output figures may put pressure on Sterling before the Bank of England delivers its own rate decision on Thursday.
We therefore forecast that the EUR/GBP exchange rate will advance over the next five days.
Euro Exchange Rates
[table width=”100%” colwidth=”50|50|50|50|50″ colalign=”left|left|left|left|left”]
Currency, ,Currency,Rate ,
Euro,
,Pound Sterling,0.8227,
Euro,,US Dollar,1.3492,
Euro,,Canadian Dollar,1.4951,
Euro,,Australian Dollar,1.5400 ,
Euro,,New Zealand Dollar,1.6644 ,
US Dollar,,Euro ,0.7412,
Pound Sterling,,Euro,1.2157,
Canadian Dollar,,Euro,0.6686 ,
Australian Dollar,,Euro,0.6499,
New Zealand Dollar,,Euro,0.6015 ,
[/table]
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