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The ECB has made it pretty clear that they are reasonably patient regarding inflation rates reaching target levels. At the moment they are not concerned about the slow speed of raising inflation. However, if this trend stops for some reason, for example, by strong EUR/USD exchange rate, then certainly they would be concerned and taking measures. Nonetheless, this is something that is not on the shelf at the moment.
The situation in Southern European countries is improving - Spain's unemployment is falling, manufacturing PMIs in Italy and Spain is at the best levels in about three years and all in all the Southern economies are starting to look better. To your mind, what are the biggest problems for these countries at the moment and are they on a path to a successful recovery?
At the moment, they are certainly on a path to a stronger growth rate, in this sense, it is a successful recovery. However, there is a big difference between these countries, especially, when it comes to unit labour cost. Spain has made a good progress; nevertheless, Italy is still lagging behind. Therefore, from my point of view, Italy still has large risks in the medium to long run, but it is not to say that they could have significant problems this year and most likely not even the next year. Although, sustainable long run recovery still has to be managed in Italy and that has not happened yet, especially, due to the sluggish improvement in labour costs.
What kind of events and decisions could determine Euro's performance?
In the short term ECB's opinion regarding the exchange rates will be highly important. Mario Draghi has expressed deliberate concerns about the strong Euro, while his very recent speeches indicated that he might pedal back. Therefore, ECB's opinion on the Euro exchange rate is very important, especially, as we are now trading around the 1.39 level. In the short term we expect that taking some tightening measures would weaken the Euro in the future. However, in the long run the main driver will be the long term impact of the Fed on the one hand, which is normalising its monetary policy and, on the other hand, the ECB which might be stuck in their expansionary monetary policy for a very long time. It is hard to say whether it will be more or less expansionary as now, but no normalisation is expected. In the long run the big question is - how significant will be the impact of quantitative difference in Fed's and ECB's policies on EUR/USD.
What are your short and longer term forecasts for EUR/USD and EUR/JPY?
For EUR/USD we expect that there will be no impact made regarding this divergence in long term policies. Thus, we are expecting an environment where low volatility will stay in place for some time. We anticipate that until autumn EUR/USD will trade in a very tight range as it has done for quite some time. Only by the end of this year we might see some strength from the U.S. Dollar due to the end of the QE and that might continue for a while. Taking that all into account, we are forecasting sideways movement till the end of Q3 and some moderately weaker EUR/USD by the end of this year. Our target is 1.34; moreover, we expect a significant weakness in EUR/USD in 2015 and our forecast is 1.23. We are quite pessimistic on the Yen, because to our mind Japan needs a weaker Yen to bring its trade balance into order. Japan's trade balance deficit together with a current account deficit would be quite risky for the nation's economy. Therefore, we expect a further Yen weakness, which should also outweigh the Euro weakness that we are seeing at the moment. In the short term we expect Japan's currency to trade around the current levels; yet, in the long run we see a significantly weaker Yen against the 18-nation currency. We anticipate the pair to trade around 148 at the end of 2015, which is a rather aggressive view.