Date: 13 Sep 2018

Arguments in support of the euro may be weakened somewhat if Wednesday’s Bloomberg report, that the European Central Bank (ECB) will revise down its 2018 economic forecasts at today’s policy meeting, prove accurate. Markets could rationally choose to draw an unflattering comparison between expectations for the US economy and the ECB’s projected outlook for eurozone economic growth. With the Federal Reserve set to hike rates again later this month, and a further US rate move increasingly likely in December, the fact that the ECB is likely today to stay with its current timetable to taper off and end asset purchases while retaining its bias to hold back from any rate hike until far into 2019, the comparison between the United States and the eurozone might anyway come into sharper focus. Traders will also be watching out for today’s US CPI data (1330h UK time) after evidence of an uptick in US average hourly earnings in last Friday’s US employment data. As for the eurozone itself, it will also have not gone unnoticed by traders or ECB policymakers that data on Wednesday showed that industrial output in the currency bloc dropped in July by 0.8 percent (worse than the 0.5 percent fall that economists polled by Reuters had forecast) while the decline in June was revised worse to a fall of 0.8 percent from 0.7 percent. Such data arguably only bolsters arguments for the ECB to revise down its 2018 economic growth forecasts. Whether or not any such developments, if unveiled at today’s ECB policy meeting, weigh on the value of the euro (EURUSD) will for the market to decide. But, with eurozone inflation fairly benign at present, the currency market could conclude that, as one way of rekindling economic growth within the currency bloc, a somewhat lower euro might currently suit eurozone policymakers, even if, as markets are aware, the ECB itself does not formally target the value of the euro as part of its policy setting.

by Neal Kimberley, External Currency Analyst.