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Euro Forecast: EUR/USD Weakness May Persist as Inflation Rates Decline

Fundamental Forecast for EUR/USD: Neutral

- The European Central Bank made clear that while it intends on winding down its QE program, interest rates will remain low for an extended period of time.

- Upcoming preliminary April inflation data for Germany and the Eurozone will show that price pressures remain weak,

- The IG Client Sentiment Index has a neutral view on EUR/USD, but traders are net-long for the first time since April 6.

See our long-term forecasts for the Euro and other major currencies with the DailyFX Trading Guides.

The Euro had a mixed week as the calendar turned through the last full week of April, with exchange rates undercut in the aftermath of the European Central Bank rate decision on Thursday. While no changes whatsoever were made between the March and April policy statements, the underlying message was that interest rates would stay low for an extended period of time, even as the ECB’s asset purchases program would be tapered further “until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.

This comment made in the ECB’s policy statement bears significance in context of the data due out over the next week. Preliminary April German CPI and Eurozone CPI are both expected to remain well-below the ECB’s medium-term target of +2%, confirming market participants’ expectations that it remains highly unlikely that any sort of rates tightening will take place in 2018.

Of note, the preliminary April Eurozone Core CPI is due in at +0.9% from +1.0% (y/y), another sign that the relatively strong Euro (still up over +8% on a trade-weighted basis over the past 12-months) is proving to be a headwind for achieving policy goals.

Other data due during the course of the week should limit the extent to which any Euro rebound may occur. The first look at Q1’18 Eurozone GDP should see growth rates decline slightly from the end of 2017, with the quarterly rate down to +0.6% from +0.8% and the yearly rate down to +2.5% from +2.7 – wholly consistent with the decline in PMI readings seen since their peaks in December and January.

While some analysts have pointed to inclement weather throughout the quarter as a reason for the slowed growth, we would posit that the preliminary April PMI readings haven’t rebounded either, and weather wasn’t exactly a problem at the start of Q2’18; there may actually be an underlying slowdown in growth.

Moving forward, the large net-long position in the futures market may prove to be an ongoing impediment to the Euro, even if the net-long position has receded in recent weeks. The number of net-long contracts held by speculators declined to +130.6K during the week ending April 24, down from +151.5K in the week prior. While there the data due out this week aren’t on the scale of the ECB meeting last week, softer growth and inflation readings could still keep the Euro on its back foot as the calendar turns into May.

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher, email him at cvecchio@dailyfx.com

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