© Geoffrey Yu
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We do not see a big impact on the Eurozone for now unless there is a serious energy supply shock. Of course governments are preparing contingencies; however, it is important for monetary policy to react in the right way. Sometimes the fear of inflation tends to be exaggerated and markets fear a hawkish approach, but in such times you need to act countercyclically and ease to mitigate the growth impact. This has been the experience during previous episodes. In all likelihood the Euro will do poorly in such a scenario.
Euro-area inflation has unexpectedly slowed in February as consumer prices rose an annual 0.7%, down from 0.8% in January. It definitely has kept pressure on the ECB to defend the 18-nation bloc against the falling prices. Do you expect that officials will make some actions to combat falling inflation?
We do expect some activity by the European Central Bank but only when policy makers see a reason to believe that their inflation outlook is materially threatened. I would argue that Mario Draghi's commentary on the Euro last week already represents verbal action, but of course some people would like to see more. The ECB remains constrained by politics and we need to bear that in mind.
What kind of events and decisions could determine the Euro performance and what are your forecasts for EUR/USD and EUR/JPY?
As stated above, any development, be it FX, geopolitical, external, which could threaten their long-term inflation forecasts would prompt action.
We expect a move back towards 1.35 in EUR/USD, and 145 in EUR/JPY.