Forex trading has resulted in the EUR/USD pair showing continued weakness recently, and the price fluctuations of this exchange rate have largely been attributed to economic data by market experts.
The currency pair dropped to its lowest value in more than two months on Friday, Jan. 31, Bloomberg reported. On this day, the EUR/USD declined to the least since Nov. 22. This movement happened as global market participants responded to key data that was provided for both the European Union and the U.S.
Key importance of EU inflation data
Figures supplied by the Luxembourg-based statistics office of the EU revealed that in January, consumer prices in the 28-nation consortium experienced a gain that fell short of the predictions of market experts, according to the news source. While economists taking part in a Bloomberg New survey gave a median forecast that this key measure of inflation would rise by 0.9 percent during the month, it increased by 0.7 percent.
The EUR/USD dropped to 1.34765 on Monday, Feb. 3, Reuters reported. This represented the lowest exchange rate for the two since late in November. The currency pair encountered downward pressure, as global market participants were affected by speculation that in order to compensate with the lackluster inflation that has been happening in the region, the European Central Bank could potentially leverage robust stimulus.
Deflation threat could force ECB bond purchases
One market expert noted that if the price level in the area starts declining, such a development could be rather troubling, according to the news source. Further bond purchases conducted by the ECB could potentially be necessitated as a result of such a situation.
“What really matters is deflation,” Hans Redeker, who works for Morgan Stanley as head of global currency strategy, told the media outlet. “The euro is going to find it very difficult to hold its value … I think that with a … fall in inflation and the development of deflation expectations the only credible instrument is outright QE (quantitative easing). It’s not the best tool, but there’s no other tool available.”
These concerns about a lack of adequate inflation in the EU helped push the EUR/USD to 1.3494 on Tuesday, Feb. 4, according to Investing.com. It was noted at the time that the concerns about the price level in the region have been persistent, as January was the fourth month in a row where inflation failed to reach 1 percent.
Economic data in the U.S.
While the figures being provided for Europe helped fuel speculation that the region’s central bank will engage in further stimulus in an effort to jumpstart business conditions there, the economic data that will soon be supplied for the U.S. created different expectations for how the Federal Reserve might act, Reuters reported.
The Fed might be able to announce further reductions in its existing quantitative easing in the event that data provided for both the U.S. jobs market and factories is strong, according to the news source.
Many market participants have been waiting for the outcome of the monthly report that was scheduled to be released by the U.S. Labor Department on Friday, Feb. 7. Such information could have a key impact on the actions of the country’s central bank, as the figures provided for December were lackluster.
Ben Bernanke, former chairman of the Fed, testified before Washington lawmakers that economic indicators such as the jobless rate would need to be at a certain level before the central bank opted to lower its stimulus.
Strong figures could accelerate tapering
The prospects for the greenback were bolstered after Commerce Department data released on Jan. 31 indicated that during the month, a key measure of consumer spending for the nation experienced an increase that surpassed the expectations of market experts, according to Bloomberg.
While median forecast of economists taking part in a poll conducted by the media outlet called for a 0.2 percent gain in household purchases, the measure rose by 0.4 percent during the month. In addition, this gauge of transactions gained 0.6 percent in December.
“The risks to the dollar are skewed to the upside,” Eimear Daly, who works in London for Monex Europe Ltd. as head of market analysis, told the news source before the figures were released. “It seems the Fed wants to get rid of its quantitative easing at this stage and there is little that will put them off their course of $10 billion of tapering each month.”
After several months of indicating that it might reduce its bond purchases in the near future, the Fed finally announced in December 2013 that starting in January 2014, it would begin buying $75 billion worth of the debt-based securities every month, compared to the prior pace of $85 billion.
Any further lowering of the stimulus used by the Fed could prompt those who take part in forex trading to put more downward pressure on the EUR/USD.
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