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Could Stronger Eurozone Inflation Extend Euro New Zealand Dollar Exchange Rate Gains?

Confidence in the Euro has improved dramatically as centrist candidate Emmanuel Macron remains the odds-on favourite to become the next French president.

Although far-right candidate Marine Le Pen also secured a place in the final run-off markets see only a limited risk of a Le Pen presidency.

This naturally boosted optimism in the outlook of the Eurozone, encouraging investors to pile back into the single currency as the threat of a Eurosceptic president appeared to fade.

Coupled with an unexpected uptick in French business confidence for April this saw demand for EUR exchange rates improve.

However, as Le Pen stepped down as the leader of the National Front, seeking to soften her image and win over more moderate voters, the threat of a fresh populist upset still remains.

The appeal of the single currency could also weaken if the European Central Bank (ECB) maintains a more dovish bias at its monetary policy meeting on Thursday.

Policymakers are unlikely to discuss any tapering of the quantitative easing program at this juncture, reducing market speculation that a return to monetary tightening could be on the cards in the near future.

Also in focus will be the latest German and Eurozone consumer price index reports, given that the ECB continues to wait for signs of a meaningful increase in domestic inflationary pressure.

Even so, an uptick in the headline figure is unlikely to increase the impetus for the ECB to return to tighter monetary policy, unless it is accompanied by an improvement in core inflation.

As analysts at Standard Chartered noted:

‘Core inflation has been below 2.0% since 2002, which is a sign that unless higher prices of energy and food feed through to higher wage demands, the ECB may have to keep monetary policy very loose for an extended period.’

While the news from the French election saw market risk appetite pick up at the start of the week this failed to put much pressure on the buoyant Euro New Zealand Dollar exchange rate.

Underlying support for the ‘Kiwi’ was generally lacking in the absence of fresh domestic data, particularly as trading volumes were limited ahead of ANZAC Day.

Nevertheless, the New Zealand Dollar could find a rallying point later in the week if the latest raft of trade data proves encouraging.

Forecasts point towards the trade balance returning to a surplus in March, with exports predicted to have outpaced imports once again.

However, if New Zealand trade conditions have not improved sufficiently on the month then the EUR NZD exchange rate could maintain its stronger footing.

Current EUR NZD Interbank Exchange Rates

At the time of writing, the Euro New Zealand Dollar exchange rate was on a bullish run around 1.56. Meanwhile, the New Zealand Dollar Euro exchange rate was slumped at 0.63.