Current Period Of EUR Strength Could Run For A While Longer
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Last week Q1 euro area growth rose 0.6% q/q, up from 0.3% q/q in Q4, beating market expectations of a 0.4% q/q increase.Although there is no breakdown of the data available as yet, the release suggests that the ECB unconventional monetary stimulus – and the lagged effects of prior policy easing – may finally be having a positive impact on the pace of activity. Coupled with the modest and ongoing improvement in the labour market, as well as the slowly improving credit cycle, growth dynamics for the euro area appear to be improving.
....Nevertheless, whilst the euro area’s growth profile has improved, it is at least partially the result of exceptionally loose monetary conditions. Owing to excess capacity, low inflation, high unemployment and evidence of secondary disinflationary effects, the ECB cannot accommodate a sustained tightening in monetary conditions. But for now, the EUR has found some popularity.
Against the backdrop of the UK’s referendum on EU membership, the recent cut in interest rates from the RBA and expectations that the RBA and RBNZ may cut rates again, the current period of EUR strength may run for a while longer.
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