Dip in Eurozone Inflation Weighs Heavily on Euro US Dollar (EUR/USD) Exchange Rate
Confirmation that the Eurozone consumer price index had dipped from 1.4% to 1.3% in January prompted the Euro to US Dollar (EUR/USD) exchange rate to shed further ground.
Markets were not encouraged by the reminder that inflationary pressure within the currency union is failing to pick up, as this gives the European Central Bank (ECB) further incentive to remain on hold.
This disappointing result overshadowed better-than-forecast German economic data, largely negating the impact of a 2.7% jump in exports during the fourth quarter.
While the Eurozone’s powerhouse economy continues to perform well a lingering sense of political risk still hangs over the domestic outlook at this juncture.
As a result the appeal of the Euro (EUR) remained somewhat limited on Friday morning, the impact of January’s ECB meeting minutes having already dissipated.
US Dollar (USD) Supported as Markets Forecast Four 2018 Fed Interest Rate Hikes
As investors continue to price in the odds of the Federal Reserve raising interest rates four times over the course of 2018 this has kept the EUR/USD exchange rate under some degree of pressure.
While the Fed itself is yet to adjust its own forecasts to include a fourth possible rate hike markets are confident that the central bank will take a more aggressive approach in the coming months.
This naturally supports the US Dollar (USD), especially as Thursday’s jobless claims data pointed towards a continued tightening of the labour market.
However, if Fed policymakers take a less hawkish tone in upcoming comments this could prompt USD exchange rates to return to a general downtrend.
Any disappointment from January’s advance goods trade balance or durable goods orders figures may also weigh down the US Dollar, with investors still holding some doubts over the outlook of the world’s largest economy.
EUR/USD Exchange Rate Rally on the Cards if February Inflation Data Betters Forecast
A rallying point could well be in store for the EUR/USD exchange rate, though, if February’s raft of Eurozone inflation data betters forecast.
Any uptick in inflationary pressure here would go some way to reversing the impact of the weaker January readings, although it is unlikely to be enough to convince the ECB.
Even so, as Tim Riddell, Research Analyst at Westpac, noted:
‘CPI will be critical in the run up to the ECB (8th) meeting and its updated staff projections. Although markets are geared for a shift in guidance, which will increase on a flicker of inflation or wage growth, underemployment is still apparent, highlighting continued labour slack across the region. Therefore markets may well be disappointed.’
On the other hand, if the consumer price index shows another decline on the month the EUR/USD exchange rate could extend its slump further.
Unless there are signs of a sustained acceleration in Eurozone inflation the Euro may struggle to gain any particular upside momentum.