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Monthly Wrap: EUR - Undermined by low inflation

currency-newsMonthly Wrap: EUR - Undermined by low inflation
Key Takeaways:
  • EUR Monthly Highs: £0.90, $1.19, AU$1.57, NZ$1.74 C$1.53
  • EUR Monthly Lows: £0.87, $1.15, AU$1.50, NZ$1.66 C$1.47
  • Germany without stable government since September’s election.
  • Subdued inflation in the bloc diminishes rate hike prospects.
Whilst the euro’s performance in November has been relatively robust, its upside potential continues to be limited by two significant factors; the first being inflation (which remains stagnant at 1.5%, below the European Central Bank’s (ECB) 2% target) and the second being the ongoing failure of German Chancellor Angela Merkel’s Christian Democratic Union (CDU) in securing a coalition government.

In respect to the latter, November saw a semblance of progress made in that Martin Schulz, leader of the Social Democrats (SPD) has now flip-flopped, asserting that he is once again willing to discuss a coalition with the CDU rather than his party becoming the opposition, as originally stated.

This news raised hopes that the two parties will renew their alliance, a prospect that could allow the German government to return to ‘business as usual’.

Whilst this development did ease some of the anxiety surrounding prolonged political uncertainty in the Eurozone’s largest economy, until a German government is successfully formed the euro is likely to remain sensitive to political pressures.

In respect to inflation, consumer price pressures are actually up slightly from October’s 1.4%, but are still a long way from target, further diminishing the prospect of a rate hike from the ECB in the first half of 2018.

Whilst economic growth did strengthen across the bloc in November, it’s unlikely that the ECB will budge until inflation rises consistently.

So what can we expect in December?

Markets will be waiting with baited breath for the latest consumer price index readings, (with the next release due on the 18th) and the December rate decision from the ECB, (due on the 14th).

Whilst the ECB is not expected to move for a rate hike, markets will be keen to assess the sentiment contained within the accompanying statement, particularly relating to the bank’s decision to extend its quantitative easing (QE) scheme.

Beyond this, the US dollar’s current surge in demand may have an impact on the euro in December, especially with economists still widely pricing in a rate hike from the Federal Reserve and US tax reform successfully progressing to its final stages.

If the ‘Greenback’ does indeed continue edging higher – as it likely will if the Republican tax reform is successful – demand will be siphoned away from the single currency, leaving the euro slightly deflated as the year draws to an end.

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