Is the Euro on the Cusp of Reversal?

Market Trends - 07/06/2017

After steadily gaining ground against the UK Pound for the better part of the last month, the higher Euro momentum is looking increasingly exhausted despite a rapidly approaching UK general election.  The vote, which is turning into a showdown between the Labour and Conservative Parties, could stoke added volatility in the EURGBP pair, especially when considering it will be accompanied by a decision from the ECB’s Governing Council.

One of the primary catalysts for the most recent dip in the Euro has been speculation that the Central Bank will issue a revised inflation outlook according to a source cited in a Bloomberg report released earlier.  Already, the data has confirmed the viewpoint that gains in inflation are rapidly decelerating.  Consumer price index figures released a week ago slowed to a 1.40% annualized increase in May compared to the 1.90% gain a month earlier.  A considerable drag on the latest results was the fading impact of the energy price rally over the last year.

With energy prices doubtfully contributing to higher inflation over the medium-term, the likelihood of consumer price gains matching the European Central Bank’s price stability mandate has deteriorated significantly.  As a result, the probability of a revised inflationary outlook has increased notably, raising the prospect of extended asset purchases.  Even though financial markets were previously anticipating an earlier end to Euro Area monetary stimulus, the rapid advance in the Euro has created a drag on growth and inflation, enlarging the risk of ECB President Mario Draghi taking steps to jawbone the currency lower during his press conference tomorrow.

A weaker Euro would help by raising the costs of imports, helping maintain positive price inflation over the near-term while stimulating trade and growth by making exports more competitive.  Although the unfolding UK political situation does present numerous downside risks for the Pound, especially if the voting results in a hung parliament, Draghi’s speech will probably generate a greater sense of short-term immediacy when it comes to policy, thereby weighing on EURGBP over the short-term.

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