TheNews

The EUR/USD had a stellar month in April closing in the 1.12 level after the ECB kicked off its stimulus program and data started printing a bit better than in previous months. Greece continued being a thorn in everyone’s side. The euro is expected to trade flat or a bit weaker in April as US data should start to print a bit stronger. In Spain and Italy, the export-led recovery has boosted industrial production and is starting to spill over into the broader economy, while deflationary tailwinds and rising consumer confidence in France have coincided with higher household spending.

Efforts by France and Italy to push through much needed structural reforms, as well as the Greek government’s decision to reshuffle its negotiating team to broker an extension to its current bailout program also bode well for stronger consumer and business confidence and longer-term growth. Headline deflationary pressures in the euro zone have also eased from -0.6% y/y in January to the most recent release of 0% in April, underpinned by rising energy and food prices. This, combined with monetary stimulus, is forecast to gradually drive the headline print up to a year-end rate of 0.6% y/y in 2015 and 1.3% in 2016. The ECB intends to fully implement its roughly €1.1 trillion QE program and has no plans to alter its policy stance unless the higher inflation trend is firmly anchored. With euro zone inflation forecast to be in line with the ECB’s target of close to, but below, 2% by 2017, we believe that QE will run its full course through September 2016.



Soft economic data for Q1, still-low inflation prints, and overall USD strength were cited by the FOMC at its March meeting as the overall rationale for delaying interest rate hikes into the later part of 2015 and moderating the extent of hikes to be delivered. An April FOMC statement that pointed to a number of economic positives but failed to mention constructive stirrings on the inflation front didn’t change our view that the FOMC is likely to engage in so-called ‘liftoff’ at its September meeting. A hawkish interim surprise would require extraordinarily strong data between now and the June or July FOMC meetings – not our base case.

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