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.

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

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