Could the Euro hit 1.20 in the weeks to come? Well, it just might.
The Euro steals the spotlight this morning following rumors that the European Central Bank could discuss the expected end of asset purchases during their meeting next week. The European currency had been under pressure in recent months as the data didn’t provide the necessary stimulus while political uncertainty in Italy and Spain forced investors to remain undecided on whether to buy the currency. So do these rumors affect the fundamental outlook of the shared currency?
Earlier in the year we were expecting the ECB to go ahead and end purchases towards the end of the summer but a bearish string of data cast doubts on this scenario. Now that this is back on the table it might just be the catalyst the Euro needs in order to stage a meaningful reversal from its current lows. If indeed the ECB would discuss putting an end to their quantitative easing program and indicate a date when they expect this to happen then yes, things could change for the Euro.
We have voiced our bearish outlook on the Euro several times but this rumored development forces us to re-examine our views. So while we still remain doubtful on whether the Single currency can rally to its early 2018 levels we have to note that if the ECB indicates a more bullish view next week then medium-term gains should be expected. The key trigger for these gains would be no other than the staff forecasts included in the ECB statement due for release next week and inflation is the critical component.
Even though growth in the Eurozone has been somewhat slow – as seen on the recent PMIs – two key catalysts have changed: the price of the currency has dropped from its 1.20+ levels and Oil has risen significantly. These two factors directly affect how inflation fares in the Euro area and higher inflation expectations set the stage for gradual tightening. As such, if higher inflation expectations find their way into the ECB staff forecasts then we should see a broader correction higher for the shared currency. The key price mark is the 1.18 level and a break above this could pave the path for a return to the 1.20 area.
Equities are trending to the upside this morning with the Asian markets looking to establish a bullish bias. The European and US futures are also pointing towards a bullish opening bell as trade-related news help investors breathe easier. An ABC News report suggested that Treasury Secretary Mnuchin asked President Trump to exempt Canada from his intended tariffs while China also offered to boost purchases of American products to help shrink the US trade deficit. This news points towards an easing of geopolitical risks which paints a positive outlook for global growth and investors are jumping into the fray to benefit from this positive tilt in risk sentiment.
MARKET EVENTS TO WATCH
- Eurozone Retail PMI – 12.10pm
- US Trade Balance – 4.30pm
- U.S. Crude Oil Inventories – 6.30pm
All times are GMT +4.