Despite the unfolding drama in Ukraine and Gaza it was another relatively uneventful week in the foreign exchange market. The losers were the Canadian and New Zealand dollars, both of which suffered as expectations of interest rate increases were marked down. The leaders were the US dollar and the safe-haven Japanese yen, closely followed by the British pound. The euro was in the middle of the mix. It lost half a cent to sterling, three quarters of a US cent and a third of an Australian cent.
There was nothing too worrying about the economic statistics from the euro zone. The -1.1% monthly fall in industrial production was marginally better than investors had been expecting and consumer price index inflation was confirmed at 0.5%. Although both numbers would be considered fairly awful in the normal course of events, investors’ expectations are so low at the moment that mediocre data are welcomed with relief.
Investors did have a bit of a problem with the results of ZEW’s survey of economic sentiment though. Even though confidence in Germany and pan-Euroland was still positive, it has been fading since the beginning of the year. This month’s readings showed a continuation of that downward trend.
There had been the possibility that the European Central Bank president might reveal some new initiative when he made his quarterly presentation to the European Parliament’s Economic and Monetary Affairs Committee (ECON) on Monday but he did not. Sig. Draghi stuck to his mantra that “inflation will remain at low levels over coming months, before increasing gradually in 2015 and 2016”. That prospect does not worry him because “medium to long-term [consumer inflation] expectations remain firmly anchored in line with price stability”.
The International Monetary Fund disagrees. In a critical report published the same day the IMF called for “concerted policy efforts to strengthen the recovery and raise inflation” in the euro zone. The implication was that the ECB’s current strategy will not be enough to rectify the situation.
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