The Euro reached a new multi-decade low against the US dollar on Tuesday as the dollar recovered after a recent bout of profit-taking in the US currency. Despite flash-crashing to end 2016, the US currency has since regained its composure as US fundamentals remain strong despite the prospect of rising interest rates. Mirroring the more positive trajectory of economic activity in the United States, the Euro Area economy is also lifting off thanks to the central bank’s accommodative approach. However, the projections of a wider policy divergence over the coming year continue to weigh on EUR/USD, paving the way for parity in the pair in mere weeks or months.
Policy Positions Drive EUR/USD to Lowest Since 2003
Europe has been greeted with a myriad of good news since the outset of 2017. Starting out with manufacturing, expansionary momentum showed gains of acceleration, with the Euro Area aggregate PMI reaching a 5 ½ year high in December, according to a survey produced by Markit Economics.Besides German output rising to a 35-month high, even Greek manufacturing activity improved modestly, contracting at a tempered pace of 49.3 compared to 48.3 in November. Adding to the optimism has been German inflation, which increased by 1.70%, marking the fastest pace since 2013. While positive in the sense that it shows a rapid improvement inflation fundamentals, better traction in Germany does not necessarily reflect Euro-wide economic strength.
Harmonized inflation, which standardizes comparison across the Euro Area, shows that France is exhibiting markedly slow price rises. According to figures released on Tuesday by INSEE, French HICP inflation rose by 0.80% on an annualized basis through the end of December, less than half the comparable German figure. This unevenness could be a problematic point for policymakers, especially those eagerly looking to wind down asset purchases while awaiting the move off the zero bound for interest rates. As a result, there are numerous factors standing in the way of Euro appreciation. By comparison, the United States has seen broad-based improvements across the board, whether housing or manufacturing activity, paving the way for further dollar gains.
