© Kenneth Wattret
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The ECB's communication has been crystal clear. They are continuing with full implementation of the policy measures they have announced. Inflation is still low and, though it is starting to pick up, it is way too soon to conclude that it would be back in line with the definition of price stability over the projected horizon. It is premature to talk about the ECB backing away from its balance sheet expansion. They will continue to strengthen the need to follow the full implementation of the policy measures.
Prices in the Euro zone rose 0.3% in May – the first increase in six months – on back of rising energy prices and consumer demand. The increase, though, is still well below the ECB's target rate of close to 2%. Do you believe it is possible for the Euro zone to reach this 2% target in the nearest future?
I believe it is possible in the long run, as long as the economy can grow quickly enough to close the output gap. However, as the output gap is large, it is going to take some time. Thus, we would expect an output trend in headline inflation to become more obvious in the second half of the year due to the base effect related to price development in 2014. The underlined rate of inflation, we think, will be going higher only gradually. Over time, things will start heading in the right direction, but it is going to take quite a long time to get inflation significantly higher in the Euro zone.
Higher inflation in the Eurozone and signs of a resolution to the Greece crisis has put the Euro under short covering pressure. A lot of analysts see a volatile week ahead for the single currency, but they expect it to start falling again and to hit new lows of below 1.05 against the USD by the end of 2015. How do you evaluate the current performance of the Euro and what will be the major headwinds for the currency throughout 2015?
It is useful to highlight that there are a lot of different influences at the moment. One source of uncertainty is development increase.Another big issue is the potential contrast within the monetary policy in the US and the Euro zone. I am convinced the ECB will stay in a dovish stream delivering its asset purchase programme in full. What is more on certain is the heavy US economy. We are currently assuming a rate rise by the Fed in September and a rebound in the economic conditions. If that happens, the EUR/USD rate should continue to depreciate and could head back to lows that we have seen before. However, until the outlook for the US is more clear, it is going to be difficult for the Euro to depreciate rapidly.
What are your forecasts for EUR/USD and EUR/GBP for the end of this year?
For the end of this year we have parity for the EUR/USD. Talking about the EUR/GBP currency pair we forecast it rolling up 0.70 levels.