The Euro to US Dollar (EUR/USD) exchange rate experienced mixed trade on Tuesday, but is forecast to fall over the coming sessions as the European Central Banks policy meeting and Greek general election draws closer.
Increased expectations that the ECB will introduce a full-scale quantitative easing programme at Thursday’s policy meeting have put pressure on the Euro. Expectations for the central bank to introduce QE were heightened today after a report out of Germany showed that producer price inflation in the currency bloc’s largest economy fell to a four-year low.
According to the German statistics agency, producer prices fell by 1.7% from the previous year in December, the steepest decline seen since early 2010 and added to the -0.9% drop recorded in November. Economists had been forecasting for a decline of 1.4%.
Following on from that data was a report which showed that confidence among Germany’s investors leapt to an 11-month high in January. Sentiment improved as falling oil prices and record low inflation has increased optimism that the Eurozone will rebound.
The ZEW survey of economic sentiment increased for a third consecutive month in January to a reading of 48.4, up from the preceding month’s figure of 34.9. The figure was the highest seen since February last year and was better than economist forecasts for a reading of 40.
‘Presumably any worries about the effect of the Greek crisis on the German economy were offset by expectations of ECB quantitative easing and hopes of a boost to exports from the weakening Euro. This may suggest that German GDP growth, which stalled around the middle of 2014 and seems likely to have been very weak in Q4, will pick back up this year. For now, we expect German GDP to expand by a steady but unspectacular 1% this year and 1.5% next, which will do little to reduce the risk of a long bout of deflation in the euro-zone as a whole,’ said Jennifer Mckeown, senior European economist at Capital Economics.
Following the release of the ZEW report the Euro stabilised against many of its most traded peers and slowed its rate of decline against the US Dollar.
Pressures remain on the currency however as we get closer to Thursday’s ECB policy meeting and Sunday’s Greek general election, which the left wing anti-austerity Syriza party is looking most likely to win.
Euro Exchange Rates:
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