Rising Eurozone Inflation does not lift EUR/USD Prospects

Intermediate

Despite signs of recovery in recent Eurozone data the Euro to U.S. Dollar (EURUSD) exchange rate ended the week on a lower note.

The pair started the past week at 1.1021 and has trended to the downside as the mood in the market has favoured the U.S. Dollar.

Eurozone inflation increased from 0.7% to 1% in November with core inflation advancing from 1.1% to 1.3% with all the underlying series bar energy prices booking an increase. From here the market has to start asking if this is the start of a more sustained increase?

There are no supply side constraints that could create a bottleneck as the capacity utilisation rate in the Eurozone decreased to 81.20% in Q4 2019 from 81.90% in Q3. This is echoed in the trend of production as manufacturing output decreased 1.70% in September 2019 over the same month in the previous year.

However, core inflation has been rising for three months in a row now and wage growth for the third quarter does suggest that upward pressure on prices is increasing. Wages grew at 2.7% in Q2

This has not led to any gain in businesses confidence which was down by 0.03 points from the previous month to -0.23 in November 2019, missing market expectations of -0.14, as managers’ assessments of overall order books and past production deteriorated.

It is, therefore, hard to see materially higher core inflation in the months ahead.

This meant that in the middle of the week, EURUSD briefly touched on a half-month-low of 1.0994 and closed on Friday at 1.1017. One may see investors show a greater willing to buy the Euro in the coming week if there is a clearing in the degree of market uncertainty or if scheduled Eurozone economic metrics show improvement and hint signs of recovery following months of slowdown. I would sell any Euro strength at 1.1263.

The U.S. Dollar has continued to find favour despite limited tangible progress in U.S. – China trade relations and the rumbling impeachment process. Underpinning the Dollar is the perception that it is safer than the other currencies correlated to trade tensions and that the U.S. economy will still benefit from trade relations improving.

That is not a given as US President Donald Trump signed a bill backing Hong Kong protestors which has piqued Beijing. That said, negotiations are still in play as both sides want to achieve a deal. It is these hopes that have offered succour to the U.S. Dollar.

EURUSD 10 year chart

Figure 1: EURUSD 10-Year Chart    Source: www.investing.com, Spotlight Group

On a daily, weekly and monthly technical perspective he sentiment is to sell the Euro. It looks as though even id there is small episodes of rotation in the long bear channel the downward trend is intact.  Targets will see 1.1017 break to yield ground to 1.0659 as the next major objective.

Stephen Pope

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d...continued

Comments on this analysis

Your email address will not be published. Required fields are marked *


Latest Related News

EURUSD Forecast: Positive tone ahead of the Fed and ECB

The focus today is on the Federal Reserve in their last FOMC Meeting of 2019.No change in interest rates in anticipated but given the better than expected US Employment data last week, the risk is for the Fed to begin to shift away from a more dovish stance to slightly more hawkish.Such a shift in tone could see the EURUSD forecast shift lower with US… Continued

US Dollar gains on Employment report

2nd - 6th December 2019 USD The Dollar closed the week with a bang after the US jobs report smashed expectations. At the beginning of the week, the Dollar spent the first four trading days of the month selling off and started to look rather oversold by Thursday afternoon. With the very positive jobs data on Friday, however, reporting +266k, we instantly saw USD bulls… Continued

US Dollar positive reversal

Strong US Employment report (NFP data) creates a US Dollar reversal in a broad sideways pattern (EURUSD lower, US Dollar Index, DXY higher)Kiwi breaks up and targets .6675 (NZDUSD) Continued

The Forex Zone Forecasts – US Dollar weakens, with Pound to USD bullish

US Dollar shifts to a weaker theme across the major currencies, with the GBP USD Chart showing a bullish break The Forex Zone looks at day trade views and forecasts for the major Forex rates; EURUSD, GBPUSD, USDCAD, AUDUSD, NZDUSD and USDJPY. EURUSD: Bull theme intact A firm rebound and consolidation tone on Thursday to build on Wednesday's spike above key 1.1097 (to signal an intermediate-term… Continued

EURUSD forecast is positive with a weakened US Dollar

A broad “risk off” scenario hit global markets Monday as US President Trump put tariffs on Steel and Aluminum imports from Brazil and Argentina, heightening the global trade war.This sent stocks lower, and in this scenario had a negative impact on the US Dollar within G3, with the greenback losing ground to both the Japanese Yen and Euro (EURUSD higher).This theme was reinforced by weaker… Continued

Forex Brokers in your location