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For the Euro side, it will probably be quite minimal, most certainly we will see a little dip in the Q3 as a result; however, I doubt that it will linger beyond the next six months. So, when we get into early 2017, there should really be no noticeable effect.
Consumer prices in the Euro zone rose 0.2% on an annual basis in July, following June's 0.1%. Although analysts remain cautious, arguing that it is a temporary improvement. Are you of the same opinion or not? Why?
I would not say it was as much of improvement, it just went from negative to positive for the headline reading; furthermore, it was more reflective of a change in energy prices. The core rate was static, and I am not sure if there is going to be much of a pick-up at all in the core CPI, on the contrary, it could actually drift lower in the next twelve months if the growth does not pick up sufficiently for the Euro zone's collective output kept to be narrowed.
What will be the major drivers for EUR through the rest of the year? What are your forecasts for EUR/USD and EUR/JPY for the same period?
I think that for the rest of the year, the key for EUR/USD rate will come from the Euro growth rate versus the US and what growth differentials are going to be. We have seen a little bit of a sluggish headline print in the US, more specifically, the first reading of the Q2 data last week. In fact, we are quite sceptical, as we think the Q2 data will be downwardly revised; however, it is very unclear what the growth rate is going to be in the US; certainly it is going to be positive, but is it going to be 2%, 2.5% or above. If it is 2.5% or above, we think the EUR/USD is probably going to grind lower and that is our base-case scenario, as we see the EUR/USD currency pair slowly moving lower over the course of the next 2-3 months, probably to as low as 1.05 in the final quarter of the year.
On the Euro side of the equation, the growth is going to be fairly stagnant. We had 1.5% growth in the Q2 in the Euro zone, but we cannot see it progressing much further amid the earlier mentioned ‘Brexit' that seems to have shaved off a little bit of growth in the second half of this year, particularly cutting some of the capital investments needed to push the GDP in the Euro zone well above 1.5%. So, I do expect a slight superiority to build between the US growth and Euro zone growth during the second half of the year and that should be enough to keep the EUR/USD on a downward path.
For the EUR/JPY it is really not much to do with the Euro growth path, I think that really is going to be down to what happens with the BoJ, we have now had the policy's fiscal plans announced by the government that are not very great, as this did not stop the EUR/JPY beginning to move lower to 113.50 just in the recent days. We also would expect the EUR/JPY to grade a little bit lower in the next month or two; however, we do think that the BoJ is going to possibly intervene to actually sell the Yen and before they do that, there is a chance of a further negative interest rate setting to be delivered. Moreover, we could see some effect through increasing the supply of the Yen to the global market that would be aimed at lowering the JPY. These measures together could push the USD/JPY quite a bit higher once we get in the year and that would stop the EUR/JPY pair from falling too much; most probably it will stabilize between 110 and where we are now at 113.50.