Optimism over ECB’s Growth and Inflation Forecasts Could Give Euro a Lift

Optimism over ECB’s Growth explained by professional Forex trading experts the “Optimism over ECB’s Growth” FX trading team.

Optimism over ECB’s Growth

Fundamental Forecast for EUR/USD: Neutral

– Futures positioning remains a major impediment for the Euro, with net-long positioning still near its 2017 high and its highest level since May 2011.

– The ECB will release new staff economic projections (SEP) on Thursday, in which there is a strong possibility that more optimistic growth and inflation forecasts are unveiled.

– The IG Client Sentiment Index suggests mixed conditions for EUR/USD in the coming five days.

The Euro finished in the middle of the pack last week, no surprise given that the Euro-Zone calendar was dry and thus exogenous influences – progress in both the Brexit negotiations and the US tax reform bill – proved to be the key driver; EUR/USD dropped by -1.04%, while EUR/GBP shed -0.39%.

While these thematic influences will remain in the news wires in the coming days, the Euro brings its own event risk to the coming week that should prove plenty market moving. The calendar is dotted with a few data releases that will generate small amounts of volatility in the coming days (on Monday, Euro-Zone and German ZEW; on Thursday, preliminary December PMIs), but the ringer this week is the European Central Bank meeting on Thursday.

Coming into the meeting, the Euro has firm fundamentals supporting it. Economic data momentum eased further last week, but remains near multi-year highs, with the Euro-Zone Citi Economic Surprise Index finishing Friday at +60.1, down from +70.3 the week prior but still higher than +58.9 a month ago. The final PMI readings for November showed that growth momentum in the region is at its strongest level since 2011.

Elsewhere, the 5-year, 5-year inflation swap forwards, one of ECB President Draghi’s preferred gauges of price pressures, closed last week at 1.708%, higher than the 1.700% reading a week earlier, and still higher than the 1.679% reading a month ago. Given that Euro strength has sustained itself over the past few months, evidence that inflation expectations continue to trend higher should put to rest any near-term concerns that the ECB might have over tapering the pace of its asset purchases as the calendar turns into 2018.

Optimism over ECB’s Growth Conclusion

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