The euro had a crazy rally last week, posting a weekly gain of 2.5% versus the dollar and touching $1.25 for the first time since December 2014. While this initially seemed to mirror the dollar’s, weakness emerging from US Treasury Secretary Steve Mnuchin’s currency talk-down, the ECB chief, Mario Draghi, attributed the euro’s strength partly to the block’s bold performance. This week, Tuesday’s preliminary GDP growth figures are said to highlight Eurozone’s robust recovery, whereas a day after, flash CPI estimates might show that inflation still lacks momentum in the region.
Eurostat is scheduled to deliver Eurozone’s preliminary GDP growth figures for the final quarter of 2017 at 1000 GMT. Analysts believe that the block’s economic growth has risen by 0.1 percentage points to the highest in a decade of 2.7% on an annualized basis, while relative to the third quarter of 2017, they project the economy to keep growing by 0.6% for the third time in a row. Tomorrow’s calendar will also see the release of the European Commission’s economic and business surveys; economic sentiment is anticipated to improve even further as the composite index is said to climb by 0.3 points to hit a fresh 17-year peak at 116.3 in January.
But forecasts suggest that inflation might continue to bother ECB policymakers in 2018. Despite the central bank maintaining an easy monetary policy of low interest rates and asset purchases amounting to large sums, inflation surprisingly showed little reaction to reach the ECB’s goal of 2.0%. While the measure managed to reach 2.0% y/y in the first three months of 2017, it then slowed down to 1.5% on average in the following months although the unemployment rate was on course to return to pre-crisis levels. For January, the unemployment rate is anticipated to remain flat at a nine-year trough of 8.7%, but preliminary CPI estimates call for inflation to start the year weaker at 1.3% y/y compared to 1.4% in the preceding month. The core equivalent, which excludes food and energy, is also expected to inch down to 1.0% y/y after rising by 1.1% for three straight months.
Euro/dollar could cheer if the data smash expectations, climbing back to the $1.24 key level. However as long as inflation shows little signs of approaching the desired level, euro gains are expected to remain restrained. Discouraging prints would also justify Draghi’s argument that some degree of monetary stimulus is still necessary, saying recently that this would be provided from “net asset purchases, by the sizable stock of acquired assets, and the forthcoming reinvestments and by our forward guidance on interest rates”. On the flip side, a worse than expected outcome could push the euro down to the area between 1.23-1.22 where the pair has been recently consolidated.
