EUR/USD Advances despite Sluggish Inflation Forecasts

Modified: Friday, 21 July 2017 12:35 BST - Written by Toni Johnson

STORY LINK EUR/USD Advances despite Sluggish Inflation Forecasts

The Euro is holding small gains against the US Dollar today, although these might not last as markets begin to rethink the recent EUR rally.

The EUR/USD exchange rate continues to press higher after hitting a two-and-a-half-year high this week on the back of comments from European Central Bank (ECB) President Mario Draghi.

Draghi commented at yesterday’s post policy-meeting press conference that the Governing Council was likely to begin discussing changes to the current stimulus measures in the autumn.

Although this doesn’t amount to much, markets went bullish on the Euro, pushing the common currency higher - to the bafflement of many analysts.

ECB Survey of Professional Forecasters Shows Weaker Inflation Expectations

The ECB Survey of Professional Forecasters for the third quarter has shown a decrease in inflation expectations, even as analysts report feeling more upbeat about the Eurozone’s economic prospects.

GDP forecasts have risen 0.2% to 1.9% and 1.8% for 2017 and 2018 respectively, while growth expectations for 2019 have risen 0.1% to 1.6%.

Unemployment expectations have also been revised lower, with joblessness expected to be 9.2% in 2017, 8.8% in 2018 and 8.4% in 2019.


By 2022, respondents believe the rate of unemployment in the currency bloc will have fallen to 8.1% - a -0.3% revision on previous estimates.

However, the ECB notes;

‘Respondents to the ECB Survey of Professional Forecasters (SPF) for the third quarter of 2017 reported average point forecasts for inflation of 1.5%, 1.4% and 1.6% in 2017, 2018 and 2019, respectively. That represents downward revisions of 0.1 percentage points at each of those three horizons. Average longer-term inflation expectations (which referred to 2022) remained unchanged at 1.8%.’

Core inflation is expected to see a slight uptick to 1.1% this year, but estimates remain unchanged for the following two years.

This bodes ill for Eurozone monetary policy, as the ECB has identified that the economy is recovering well, but is still waiting for inflation to pick up.

The trend of strong economic data but weak price pressures looks set to continue for some time, which may suggest monetary policy could stay loose into the long-term.

Lack of Data Leaves USD Soft as Fed Hike Odds Remain Low

Odds that the Federal Reserve will hike interest rates again this year are currently below 50%, suggesting that the outlook for US monetary policy remains underwhelming until next year.

This, combined with a lack of domestic data today, is keeping the US Dollar rather unappealing.

Yesterday’s jobless claims figures are also still weighing on USD, after showing a larger-than-expected number of people continued to claim unemployment benefits than had been expected.

While initial jobless claims figures undercut forecasts by 12,000, continuing claims were almost 30,000 higher than anticipated at 1.97 million.

Empty Data Calendar Ahead; Will Markets Decide EUR Rally is Overdone?

There is nothing left on the economic data calendar for either the Eurozone or the US, which means the EUR/USD exchange rate is likely to hold its current trajectory for the remainder of the day.

Fears that the Euro rally has been overdone could strengthen over the rest of the session, however, which may weaken its gains.

However, the relative strength indicators suggest that, on the technical level, the EUR/USD exchange rate is well-valued.

The RSI for the pairing is currently at 55.9, only just above the neutral 50 mark that indicates fair value and well below the 70 level that would suggest the pairing is overbought.

In the short-term, Societe Generale believes that the EUR/USD will break above 1.20, although it will then be in for a correction lower;

‘EUR/USD is still moving upwards in tandem with a gradual tightening in real and nominal yield spreads. The euro is rising faster than seems consistent with the move in yields, but that’s consistently been the case since March. At some point, this is going to result in a correction for the euro, but we suspect that EUR/USD will reach 1.20 first.’

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TAGS: Euro Forecasts