The euro weakened yesterday after the European Central Bank pledged to continue its quantitative easing program while raising its growth and inflation forecast. The common currency is mostly flat this morning. The Bank now forecasts GDP growth of 2.3% in 2018 (versus 1.8% previously). Inflation is forecasted to accelerate to 1.4% in 2018 (versus 1.2% previously). Similar to other developed economies, the Eurozone is grappling with weak wage growth which is putting a lid on inflation. As inflation remains below the ECB's target rate of 2%, this lowers the likelihood of tighter monetary policy in the future. As such, the euro weakened as the Bank's 'easy money' policies are set to remain in place. According to Reuters, critics who have been calling for a change to current monetary policy have been unsuccessful given weak inflation. Mario Draghi has repeatedly emphasized that while economic data is trending in the right direction, substantial monetary stimulus remains necessary. Our short-term outlook on the euro is neutral, while our medium-term outlook remains bullish.
The EUR/USD exchange rate is now trading above 1.1780. Looking at EUR/JPY, the pair is down today and is currently trading just above 132.20. The euro is flat against the pound, with EUR/GBP now trading above 0.8760.
This week’s Eurozone events and economic data includes an ECB meeting and German inflation figures. German ZEW survey results were mixed. Economic sentiment was lower than expected (17.4 vs. 18.0 expected) while current situation was higher than expected (89.3 vs. 88.5 expected). German CPI figures met expectations (1.8%), while wholesale prices were lower than expected (3.3% vs. 3.4% expected). Eurozone employment was higher than previous figures (1.7% vs. 1.6% prior) while industrial production beat estimates (3.7% vs. 3.5%). Eurozone Markit Composite PMIs (58 vs. 57.2 expected) beat expectations as growth remains strong. The ECB upgraded its outlook for growth and inflation while maintaining its current monetary policies. Later today, we’ll see Eurozone trade balances. Last week, Eurozone Q3 GDP growth beat expectations.
As the euro weakens relative to the US dollar, we are downgrading the currency to neutral in the short-term. Looking at various technical indicators, the currency is trading within a normal range. This is based on a daily chart of the euro currency index.
As monetary policy expectations and economic growth power the euro, we are upgrading the outlook to bullish in the medium-term. Note that the euro is trading within normal ranges. Our analysis is based on various technical indicators when looking at a weekly chart.