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Euro to Australian Dollar (EUR/AUD) Exchange Rate Climbs on Uptick in Core Euro Area Inflation

Core Eurozone Inflation Rises, EUR/AUD Exchange Rates Capitalise

The Euro Australian Dollar (EUR/AUD) exchange rate climbed on Wednesday amid mixed inflation reports from both the Euro Area and Australia.

Whilst the Eurozone’s economy is enjoying its best growth in over a decade, consumer prices within the bloc continue to prove largely weak.

According to figures on Wednesday from the EU’s statistics agency, annual consumer price inflation across the 19-country bloc decelerated to 1.3% in January, down from the previous period’s 1.4% and indeed the market forecast of 1.4%.

This rate is the lowest since July, suggesting that a strong Euro has weighed on prices by lowering import costs and effectively making exports from the bloc less attractive for buyers.

The core inflation rate, however, (which excludes volatile items like food and energy), did post a modest increase in January from 0.9% to 1%, reason enough for markets to favour the Euro over the currently struggling Australian Dollar.

Nonetheless, both of these figures remain below the European Central Bank’s (ECB) target range, further diminishing the possibility that the central bank will move hawkishly for some time.

Australian Inflation and Private Sector Credit Readings Disappoint, AUD Exchange Rates Tumble

Data from Australia on Wednesday proved disappointing across the board.

Quarter-on-quarter consumer prices held steady with growth at 0.6% – though this was below the market forecast of 0.7% – whilst the year-on-year reading for this period printed at 1.9% – also below the market expectation of 2.0%.

Paul Dales Chief Australia and New Zealand Economist at Capital Economics shared his thoughts on the readings:

‘The Q4 inflation figures were largely as expected, with the main message being that inflation is still just below the 2-3% target range and we think it will stay there’.

With consumer price growth still below the Reserve Bank of Australia’s (RBA) target range the chances of a near-term rate hike could be scuppered – a prospect that has pushed investors further away from the ‘Aussie’ Dollar.

In other news Australia’s private sector credit readings fell in December, with the year-on-year reading decelerating from 5.4% previous to 4.8% – significantly below the forecast 5.2%.

These figures mostly played second-fiddle to the inflation readings, though the soft credit report also provides little reason for the RBA to move hawkishly.

EUR/AUD Forecast: Volatility Likely on US FOMC Rate Decision

The EUR/AUD exchange rate could become increasingly volatile today depending on the result of the imminent US FOMC rate decision.

Whilst markets are not currently expecting a rate hike from this meeting, there is the possibility that the central bank will adjust its statement to reflect an increasingly optimistic outlook.

This possibility has been echoed by policy makers, with some asserting that the bank’s previous meeting perhaps over-exaggerated the negative influence of US tax reforms.

On the other hand, the US continues to struggle with issues like limp inflation and poor wage growth – both factors that the bank could bring up in its latest assessment.

If the US Fed proves hawkish then market appetite for riskier currencies like the Australian Dollar will fall, effectively keeping the EUR/AUD exchange rate in the single currency’s favour.

If the central bank proves dovish, however, then risk appetite may grow and the EUR/AUD pairing could encounter greater pressure.