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Soft ECB Outlook on Eurozone Inflation Keeps EUR/AUD Exchange Rate Flat

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European Central Bank (ECB) Gives Markets Little Reason for Cheer, Weakening EUR/AUD Exchange Rate on Uninspiring Inflation Forecast

The EUR/AUD exchange rate has remained around opening levels today, after the European Central Bank’s first Economic Bulletin of 2018 disappointed markets with its uninspiring outlook on Eurozone inflation.

The communication remained in line with the general tone taken by Eurozone forecasts for several months now, in that it stated the currency bloc economy is expected to continuing growing strongly, but this will not translate into increased price pressures.

On the one hand, the ECB bulletin noted that ‘the strong cyclical momentum, the ongoing reduction of economic slack and increasing capacity utilisation strengthened further the Governing Council’s confidence that inflation will converge towards its inflation aim of below, but close to, 2%’.

However, the Governing Council also stated;

‘While the Governing Council’s confidence that inflation will converge towards its inflation aim has strengthened, domestic price pressures remain muted overall and have yet to show convincing signs of a sustained upward trend.’

This means that it is unlikely the European Central Bank will be making any hawkish adjustments to monetary policy anytime soon.

Stagnation for EUR/AUD Exchange Rate, even as RBA Governor Lowe Doubles-down on Dovish Monetary Policy Outlook

A speech this morning from Reserve Bank of Australia (RBA) Governor Philip Lowe has failed to particularly support the EUR/AUD exchange rate higher today, even though he repeated his dovish view on monetary policy.

Lowe said that there wasn’t a ‘strong case’ for the RBA to hike interest rates and once-again repeated his assertion that board wasn’t going to be pressured into tightening monetary policy just because the central banks of other nations – such as the Federal Reserve, Bank of Canada (BoC) and Bank of England (BoE) – were becoming more hawkish in their policy outlooks.

‘Our circumstances are a little different,’ Lowe stated in prepared remarks. ‘We are still some way from what could be considered full employment and our central scenario for inflation is for it to remain below the mid-point of the medium-term target range for the next couple of years.’

Lowe claimed that it will only become appropriate for interest rates to start moving higher when the joblessness rate is reduced and inflation moves towards the mid-point of the RBA’s 2-3% target range.

He also pointed out that the RBA hadn’t had to slash interest rates to ‘extraordinary low levels’ in response to the financial crisis; the official cash rate (OCR) is currently at 1.5% – a level only just returned to by the Federal Reserve and 0.25% higher than that of the Bank of Canada, while BoE rates are currently 0.5% and the European Central Bank (ECB) has 0.00% borrowing costs and a -0.4% deposit rate.

However, these comments simply build upon what Lowe said earlier in the week following the latest Reserve Bank of Australia (RBA) monetary policy meeting, so his dovishness has not come as a shock to markets today.

This has protected the Australian Dollar from registering strong losses versus the Euro.

US Fed Speeches Threaten Volatility for EUR/AUD Exchange Rate; Chinese Data Tomorrow could Alter Australian Economic Forecast

There is a lack of Eurozone or Australian data on the calendar for the remainder of the day, meaning that the EUR/AUD exchange rate is likely to be vulnerable to changes in the US monetary policy outlook.

This is because Federal Reserve officials Patrick Harker and Neel Kashkari are due to speak this afternoon.

Although neither gets a vote on monetary policy this year, they still participate in the Federal Open Market Committee (FOMC) meetings and could therefore sway other policymakers.

Signs of hawkishness from Harker or Kashkari could boost the US Dollar, which would weigh on the Australian Dollar more than the Euro.

Tomorrow’s early-morning data for Australia includes the December home loans, investment lending and value of loans data, as well as the Reserve Bank of Australia’s Quarterly Statement on Monetary Policy.

Given that Governor Lowe has made it very clear that falling unemployment and rising inflation are necessary before the RBA considers hiking interest rates, the quarterly statement is unlikely to provide any support for the Australian Dollar – unless it forecasts tightening labour market conditions and rising consumption in the near-term.

Chinese inflation data is therefore more likely to have an impact upon the Australian Dollar, as the strength of consumption in Australia’s biggest export market could have a significant impact upon Australian business.

There is no Eurozone data on offer tomorrow.