The Euro to US Dollar (EUR/USD) exchange rate is forecast to reach parity next week, as investors grow increasingly concerned over the European Central Banks (ECB) €1 trillion quantitative easing programme and focus on a Federal Reserve policy meeting.
As the week ended, the Euro weakened by 1% against the US Dollar to reach a new 12-year low. The currency fell despite the release of disappointing out of the USA. Some economists are concerned that the quantitative easing programme could lead to stronger Eurozone members such as Germany strengthening further at the expense of weaker members.
There is a risk that monetary easing could create share price bubbles in real estate and share prices which could cause Germany’s economy to overheat. If such a scenario occurs, it would widen the gap between rich and poor member states, putting further pressure on the already strained fabric of European integration. With Greek and German relations deteriorating, expectations of a closer union look distant.
‘I’m a bit nervous about this, that there might be something like too much success. I have the feeling we do not understand the full effect of negative interest rates in many instance,’ said Governing Council member Ewald Nowotny.
Concerns over the situation in Greece also weighed, as the euro group of finance ministers continued talks in Brussels to discuss a reform package put forward by Greece as part of its bailout review. Greek Prime Minister Alexis Tsipras said on Thursday that the country would be able to fulfil its financial responsibilities, even if creditors do not a pay a tranche of aid
Next week, the Euro is expected to weaken further as market attention turns to Wednesday’s Federal Reserve policy meeting. Any signs that Fed policy makers are moving closer to raising interest rates and the US Dollar will strengthen further and could reach parity with the single currency.
Other data of interest will be Tuesday’s Eurozone inflation data. Economists are forecasting that the Eurozone’s inflation rate improved in February. Core inflation is expected to remain steady at 0.6%, whilst monthly inflation is expected to improve from -1.6% to -0.01%. On an annual basis, inflation is expected to improve from -0.6% to -0.3%. ZEW Economic sentiment data will also be released and is likely to improve from a reading of 53.0 to 56.69.
The Euro could also be softened by concerns over the Ukraine situation. EU leaders are unlikely to reach an agreement at next week’s summit to prolong economic sanctions against Russia.
German confidence data could offer the Euro support on Tuesday.
