Over the past six months, the Euro has been the weakest currency in the foreign exchange market. Indeed, it has become the weakest currency against the Swiss Franc. As per the recent update, the Euro is currently trading stable at 1.1428 against USD (EUR/USD). It’s been undergoing a very small slide in value against almost all of the major currencies. Analysts attribute these positive changes to continued economic peril. They cite inflation targets imposed by the independent European Central Bank (ECB) as a particularly villainous culprit.
The Euro is down just 0.05% today vs the Swiss Franc (CHF). This new adjustment recognizes the increasing complexity of lay currency valuations. It has continued to shoot up in value compared to all other currencies. In particular, it is up 0.06% with respect to U.S. Dollar, up 0.13% versus British Pound (GBP) and up 0.17% with respect to Japanese Yen (JPY). It has up by 0.09% on the Canadian Dollar (CAD). In addition, it was up 0.20% vs the Australian Dollar (AUD) and 0.37% vs the New Zealand Dollar (NZD).
Economic Factors Influencing Euro Valuation
The poor current performance of the Euro is a symptom of wider economic woes that are rocking currency valuations across the board. The Eurozone, for example, can’t maintain a 2 percent inflation target. How long until we reach the goal? Now that ECB officials are openly pushing for further easing to monetary policy to achieve the 2% inflation target.
Martins Kazaks, also a member of the ECB’s governing council, noted that there was a need for more action to bring inflation under control. He added that “very probably maintaining 2% inflation will take some additional decreases for calibration.” This comment shines a spotlight on the sense of urgency among ECB officials to restore economic stability.
Kazaks built further on the expectations for the market. He cautioned that “the market pricing of one additional cut or two is not far beyond the bounds of the baseline.” Pundits, columnists, and traders alike may hope to see further shifts in monetary policy in the new future. This speculation has the potential to influence the strength of the Euro against other currencies.
The Role of Inflation in Currency Fluctuations
Inflation is still the key driver of the Euro’s strength. Kazaks underscored that “fine-tuning cuts will very much be contingent on how the economy continues to evolve.” The ECB would do well to proceed cautiously. They understand, correctly, that future decisions about the direction of monetary policy are based on economic data and economic performance.
Additionally, he raised reasonable alarms about the dangers of inflation targeting. Those risks of a too persistent or too large a deviation from target are what we need to take care of, Kazaks said. This caution illustrates an understanding of the damaging effects that long-term departures from target inflation can have on economic growth and the strength of the dollar.
Kazaks argued that present market conditions are evidence of a deflationary trend due to trade wars. He urged that “the final outcome is not predestined. This openness reflects an unusual lack of confidence in how outside forces might change economic variables and currency values.
Future Outlook for the Euro
Focusing on the future, Kazaks suggested that future changes to policy might steer monetary policy in such a direction that the Euro’s course may be modified. Further, he underscored that the ECB is willing to explore further accommodative territory in the future. He was quick to stress that this isn’t coming any time soon – or at least it shouldn’t. Further economic deterioration or continued inflationary pressures could make a hike necessary for the ECB. They even could opt for monetary easing in more destructive ways.
Kazaks underscored that the steps approved in June were intended to secure long-term stability of inflation. He stressed that these reductions were key to getting inflation to begin to turn the corner and head back towards 2% by 2026. This cautious tone is a reassurance of the ECB’s focus on long-term macroeconomic objectives amid short-term volatility.