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EUR/USD Analysis

  • Dovish[1] ECB grapples with COVID-19 hesitancy and higher inflation.
  • Growth prospects stifled.
  • Is the U.S. dollar[2] rally just beginning?
  • Room for bearish augmentation.
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EURO FUNDAMENTAL BACKDROP

EURO[3] AREA FACES GROWING CHALLENGES

The European Central Bank (ECB)[4] have thus far remained the most accommodative of the major central banks[5] and now have added complexity to their task with the recent spread of COVID-19 throughout the Euro area. Persistent high inflation[6] in the continues to plague the region, and is unlikely to soften with cold temperatures projected for the winter months (higher energy demands). The spread of the virus is expected to compound the problem in relation to slower economic growth[7], sparking the stagflation debate once more. Simply put, rate hikes could help slow inflationary pressure but would come at the cost of a higher cost of borrowing, putting further pressure on households and businesses – limiting economic growth.

Another headwind facing the Euro is the fact that the Pandemic Emergency Purchase Programme (PEPP) which is scheduled to end in March of 2022 is set to be unaffected by virus which does not bode well for the economy should the situation get worse.

Germany’s Ifo Business Climate (NOV) release and the GfK Consumer Confidence (DEC) acts as a barometer for the Euro area and with both events missing, indicates the weary outlook by market participants.

GERMANY ECONOMIC CALENDAR:

Ifo business climateGfK consumer confidence

Source: DailyFX Economic Calendar[8]

Later today (see calendar below), ECB minutes will be released from the November meeting. Investors will be closely scrutinizing details around asset purchases and rate hikes.

ECB minutes

Source: DailyFX Economic Calendar[9]

IS THE DOLLAR RALLY FADING?

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currensceneFLOGO WHTsquareThough not the oldest form of currency, some form of shell money appears to have been found on almost every continent. The shell most widely used worldwide as currency was the shell of Cypraea moneta, the money cowry.

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