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Euro Continues to Defy Gravity After Mixed Data Bag

Euro Continues to Defy Gravity After Mixed Data Bag

Martin Essex, MSTA,

EUR Talking Points:

- EURUSD continues to rise as the Euro-Zone economy steams ahead even though inflation remains subdued.

- ECB must decide whether to tighten monetary policy to cool the economy or leave it loose to stimulate consumer price rises.

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The Euro remains in demand as the European Central Bank continues to face a difficult question: whether to tighten monetary policy to cool a buoyant economy or to keep policy loose while inflation stays under its target of below but close to 2%.

Data released Wednesday showed German retail sales down by 1.9% in December both month/month and year/year. However, German unemployment fell by a larger than expected 25,000 in January and the unemployment rate in the Euro-Zone as a whole stayed at 8.7%. Inflation in the Euro-Zone slipped to 1.3% in January from 1.4% while core inflation edged up to 1.0%.

Against this mixed background, the Euro continued to take the path of least resistance: upwards.

EURUSD Price Chart, Daily Timeframe (February 1, 2017 to January 31, 2018)

Chart by IG

Speaking Wednesday, ECB executive board member Benoit Coeure repeated the central bank’s official line that it expects its key interest rates to remain at their present levels for an extended period of time and well past the horizon of its net asset purchases.

We do not believe that the distribution of future inflation risks has moved permanently lower, he added, although many commentators reckon that the current strength of the Euro is adding to the ECB’s headache by keeping inflation so far below target.

Looking ahead

Coeure noted that quantitative easing in the Euro-Zone will not last for ever but added that there is a very broad agreement that the bank’s rate setters have to be patient and prudent, and are not going to be too hasty to change policy.

Nonetheless, further reductions in the ECB’s asset purchases – or even an end to them – seem more than likely late this year, and that will likely continue to support EURUSD, especially if the Dollar remains weak.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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