The euro had a mixed start to the week as data releases from the Eurozone were varied. On Monday, positive growth figures from the German Retail Sector buoyed the performance of the single currency and caused it to strengthen against both sterling and the US dollar. Improvements in rates were tempered, however, by the flash inflation estimate from the Eurozone, which put inflation in the eighteen-nation bloc at 0.5% – this was 0.1% lower than expected.
The single currency fared moderately well in the lead up to the most highly anticipated event of the week, which came yesterday in the form of the European Central Bank (ECB) press conference. As expected, the ECB left interest rates unchanged at 0.25%, but ECB President Mario Draghi caused the single currency to weaken when he reasserted the Central Bank’s intention to use any means possible to prevent the threat of deflation from materialising. A range of methods for raising inflation were considered, including quantitative easing and the reducing of interest rates to negative levels. Both of these measures would have a considerable negative impact on the eighteen-nation currency, hence the sharp change in euro rates across the board. While inflation remains significantly below the 2% target the threat of such action is likely to remain, and could further harm the euro. Equally, if we see unemployment and inflation data improve, the euro is likely to strengthen. Today, German factory orders data is due out, which could have a bearing on euro rates.
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