While there was some sporadic movement in euro rates yesterday, net shifts were relatively limited. As yet, traders seem unsure of where to position themselves ahead of the all-important mid-week inflation data. I even heard on the radio this morning a commentator forecasting that the euro would weaken by 10% over the coming months. Extreme in my view but it may prove to be right!
Today’s German Consumer Price Index data (CPI) may have a more decisive impact on the performance of the single currency given that the data from the Eurozone’s largest economy will give a strong indication as to how tomorrow’s Eurozone CPI figures come out. Inflation data has had an increasingly strong bearing on euro rates of late, given the strong rhetoric from European Central Bank (ECB) President Mario Draghi. Draghi has threatened decisive action should we not see a slow increase in inflation towards the ECB’s 2% target over the coming months. Such action, including quantitative easing and negative interest rates, would certainly have a negative impact on the strength of the euro. A reading of significantly less than the forecast 0.8% is likely to cause sharp weakening in euro rates, whilst a reasonable improvement on last month’s 0.5% is likely to give the single currency a substantial boost.
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