The euro strengthened sharply on Friday as Eurozone inflation data came out better than expected. The inflation data – which is based on consumer spending – put inflation at 0.8%, which is an increase on the 0.7% that was widely predicted. Higher inflation reduces the pressure on the European Central Bank (ECB) to further reduce interest rates during this week’s meeting and as lower interest rates have a negative effect on currency, this caused the single currency to perform well. Notably, the euro–US dollar rate reached its highest point for 2014; the Eurozone currency also made gains against sterling.
Looking ahead to next week, the main event likely to cause movement in euro rates is the ECB interest rate decision and following press conference on Thursday. Should ECB President Mario Draghi announce that the ECB will lower interest rates further we would expect to see euro rates drop sharply across the board. Any comments regarding future monetary policy in the following press conference also have the potential to cause sharp rate movements as traders and investors try to interpret the guidance given. In addition to this, a number of other economic indicators are due out this week, all of which may cause movements in rates if results differ greatly from what is predicted. The February Purchasing Manager Indices (PMI) for manufacturing and services are released in the first part of the week for the Eurozone and individual countries. Other indicators include Italian manufacturing data on Monday, the Spanish unemployment rate on Tuesday and Eurozone retail sales figures on Wednesday.
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