According to National Bank of Canada analysts, the Euro could appreciate in the coming month considering that the economic situation will likely improve.
Key Quotes:
“The GDP and employment reports will come as a relief to the European Central Bank which had been criticized in some quarters for phasing out its bond purchase program in December in the face of slowing growth. Trying to reassure market participants, ECB President Mario Draghi had stated at the central bank’s last monetary policy meeting that the ECB stood poised to “adjust all its instrument” if growth continued to disappoint. Although this morning’s news suggests such “adjustments” won’t be necessary, we’ll have to wait to see core inflation picking up before ruling out the possibility of additional monetary stimulus. No need to say that Friday’s advance CPI release for April will be watched closely.”
“Complicating things further for policymakers is the recent weakness of advanced indicators for the eurozone. Markit’s manufacturing PMI indeed remained in contractionary territory in April in both France and Germany while the European Commission’s Index of Economic Confidence decreased for a tenth consecutive month, dropping 1.6 point to a 31-month low of 104.0. Sinking the index was lower confidence among consumers (-7.9 vs. -7.2 the prior month), hardly the indication of an upcoming pickup in consumer spending. “
“Add to that the persistence of uncertainties related to geopolitical factors (think Brexit) and the threat of protectionism and you get a pretty delicate situation for the ECB. It is obviously too soon for the central bank to be talking about an eventual normalization of its policy. Better make sure that the recovery has legs by going ahead with a new phase of subsidized loans to banks (TLTRO III) and the introduction of a tiered system of negative deposit rates designed to alleviate the pressure on European financial institutions that are currently paying the ECB to hold their assets.”
“Looking ahead things are likely to improve. Mind you, we’re not calling for stellar growth in the eurozone this year (1.3%), but we feel that too much bad news is being priced in European assets at the moment. This is why we see the euro appreciating in the coming months.”
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