2nd September 2020 - The lower EU inflation puts pressure on the common currency

Walid Salah Eldin

Active member
The European equities indexes are trying to track the future of the US ones which are always referring to the upside.

The germane DAX 30 could get over 13200 "until now", following Nasdaq technology companies shares boom which barely have bottoms over the short term to be re-purchased again, while Nasdaq 100 future rate is referring now to existence close to 12430.

No one knows exactly what fuels that bubble of the US equities, despite the down side pressure of corona virus on the economy which is still struggling to regain its previous expansion pace and hiring momentum with no bipartisan conviction yet over new stimulus reflation plan.

EURUSD could get over 1.20 psychological level yesterday scoring higher high of this year at 1.2009 but US ISM manufacturing index of August could revive again the demand for the greenback across the broad sending EURUSD down to be traded now below 1.19 near 1.1875.

while the single currency is not looking in good conditions, as it is expected to have similar shift in its monetary policy and inflation targeting as the Fed's chief Powell outlined at Jackson Hole symposium last week, letting the inflation to fly higher than its normal 2% yearly expansion target it adopts over the medium term to support the economy and labor market which can get ready for higher inflationary wage pressure, without intervening from the Fed by raising rates.

In the same time, EU CPI flash figure of August came out yesterday to show continued slide to the downside referring to yearly slump by 0.2%, while the consensus was pointing to increasing by this same rate, after rising by 0.4% in July and even the core figure excluding food and energy rose by only 0.4%, while the median forecast was rising by 0.9% following soaring by 1.2% in July.

The figures show that there can be another easing step to come somehow by the ECB and that can boost demand for EU equities further and hurt the common currency appreciation which weighs down further on the inflation. The ECB Chief Economist clarified at these current levels of exchange rate that The ECB is monitoring the EUR values!

The last easing step of ECB was by raising its emergency bonds buying program higher by added €600b last June, as the labor market was rapidly deteriorating and the contraction is “significant” but Christine Lagarde the head of the bank expected although rebounding in Q3.

God willing, the market will be waiting next week for the ECB governing council members meeting with higher hope for further easing action can be by expanding its QE program or Pandemic Emergency Purchase Program (PEPP).

Despite The German court ruling judgment to cap ECB QE plans which have been granted previously in Dec 2018 by the ECJ (European Court of Justice) to let the ECB buy governmental issued bonds.

Kind Regards

Global Market Strategist of FX-Recommends

Walid Salah El Din
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