The Euro is enjoying a solid start to the week as the markets have been pricing in a tentative Federal Reserve Interest rate meeting this week. Although the Federal Reserve did raise interest rates for the fourth time in 2018 last night, the Federal Reserve’s tone to their 2019 interest rate path was fairly dovish as the US economy shows signs of slowing down.
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This has allowed the Euro to advance nearly a percent this week so far against the Greenback. Against Sterling, the current political pressures from Brexit is keeping Sterling firmly under pressure and allowing the Euro to remain fairly buoyant.
But for how long? The Eurozone has posted a weak third quarter of economic growth and there are serious concerns regarding the slowdown within the Eurozone and whether this will continue.
Mario Draghi and his European Central Bank policy makers are watching this closely and are keeping fairly tight lipped regarding future monetary policy stimulus due to the global trade war causing a slowdown in Eurozone, particularly German exports, Italian Politics and finally Brexit, all bruising investor confidence.
Unsurprisingly the Italian Government did not continue with their demands and have met the EU in the middle in order to push a budget through. Italy’s Prime Minister Salvio Conte praised the deal as a real success for the nation as he can still deliver his manifesto that got him elected.
However comments from the EU suggest the deal does little to resolve the Italian deficit and essentially just kicks the problem down the road. Italian economic growth forecasts have been cut to 1% which if they’re aren’t met means this time next year the exact conversations will be taking place. Essentially the problem is for now no longer a focus for the EU and they can focus all resources on Britain’s EU exit rather than fighting multiple battles.
Yesterday, German Producer Price Index data dipped to 0.1% in November, its weakest gain since February this year. Although this isn’t considered a major release, it still highlights a worrying trend that inflationary pressures within the driving force of the Eurozone are lacking. This could be a warning signal for severe Eurozone weakness in the future in the coming months, if this problem persists.
Apart from a Eurozone current account release today, the markets aren’t expecting much for the Euro as we end the week. I would expect the main driver for the Euro for the rest of the week to be Brexit updates, with any further news of a no deal Brexit weakening Sterling and allowing the Euro to advance. I’d suggest clients keep an eye on Brexit developments for the remainder of the week.
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