Euro zone industrial production fell more than expected in August

Ulrich Leuchtman, Currency Strategist at Commerzbank, on the Euro zone economy and EUR

Euro zone industrial production fell more than expected in August, reflecting a slump of 4.8% in the output of capital goods used for investment and raising concern that the economy is weaker than previously thought. Taking all into account, how do you evaluate current situation in the Euro zone area?

Industrial production is a volatile measure, however, it certainly points to the fact that we are seeing very weak growth in the Euro zone. This is something, which is confirmed not only by cooling economy, but also by the sentiment indicators. Therefore, despite the fact that situation in Euro areas might show even weaker pictures than we have now, it maintain the general view that the growth will be very slow for the rest of this year and also next year.

European finance ministers, meeting in Luxembourg, debated how to increase investment to spur moribund euro economies. The European Commission is about to come up with details of a 300 billion euro 3-year investment scheme by the end of January. In your opinion, how effective this measure is?

Normally, clever investment in the infrastructure might turn out to be a positive effect. Nevertheless, the experience that we have with similar measures in the past was not always as effective on productive capacity of the economies, as it should be. Therefore, I am still a bit skeptical about the effect on growth potential in the Euro zone.

What do you expect to be the most important drivers for the European shared currency this year and also at the beginning of the upcoming year?

Certainly, I suppose at the moment the most important question is, if the ECB comes back to QE program. In other words to a fullyfledged securities program including purchases of governments bonds. Moreover, I believe the falling inflation expectations stands as a strong argument for it, as well as the weaker growth numbers that we will have to expect from the Euro zone in 2015. These are all the arguments, which make QE more likely, and this would be a very negative argument for the European currency.

What are your forecasts for the EUR/USD, EUR/GBP and EUR/JPY for the end of the year?

We forecast the EUR/USD to be around 1.25 by the end of the year and the EUR/GBP to be at 0.77. Talking about the EUR/JPY currency pair, we can see it touching 138 levels.