Euro strongest since 2018 despite the negative inflation

The main European currency is pushing a long unwitnessed level of 1.20 today. However, it might be more accurate to say that it’s rather weaker American dollar that is pushing the Euro up. Bottom line is that the eurozone fundament is by far not so strong as the strength of its currency might suggest. Be it as it may, the dollar it’s still no light at the end of the tunnel for the Dollar which means that Euro is free to go towards eventual strengthening. 

The strengthening of the Euro has been caused by the weakening of the Dollar. 

For three weeks the American Dollar has been moving around the same level and many investors were asking themselves if this isn’t the exact opportunity to start speculating for the trend to turn around. However, the Dollar kept on losing over the Euro, even more so in the past week. The FED stopped targeting the 2% inflation and will be watching the average inflation rate instead. It’s simply a way to keep low interest rates despite the case a more rapid price growth should occur. The ten-year bond yields have fallen again to 0.7% since then. However, this doesn’t mean that if yields go up, it would have necessarily meant that the dollar would strengthen. At this point, it all seems that the Dollar will remain under pressure due to a combination of many factors such as expansive monetary politics, weakening dollar dynamics, or surge of the stock market. 

 

Eurozone’s core inflation at its historical minimum

One of the currencies that thrives on a weaker Dollar is undisputedly the Euro. This can be seen on the EURUSD pair today where we can witness testing of a strong psychological level of 1.20. This will probably prompt traders to focus on a breakout. However, it won’t be supported by very good fundament. That’s because the inflation in the eurozone has slowed down to -0.2% (and core inflation to 0.4%). Inflation has appeared in the negative realm for the first time since June 2016 with core inflation being on its historical low. 

 

Reviving economic activity in this region was not enough to support the economic demand. ECB warned about the further slowing of inflation but the negative outcome might be problematic for this bank. Aggressive deflation, growing unemployment, slower wage growth, these are one of the warning signs for the ECB and a hint of what might come in the future. On the other hand, the German government has changed its estimate of the economic downturn to a contraction of 5.8%, compared to the previous 6.3%.

 

Figure1: Inflation progress in the Eurozone (Source: bloomberg.com)