Forex Flash: Euro to remain under downside pressure - BTMU

Lee Hardman of the Bank of Tokyo Mitsubishi UFJ notes that the Euro continues to remain under downward pressure following the inconclusive Italian election results which has resulted in investors adjusting higher Italy’s sovereign credit risk premium.

The more prolonged the economic uncertainty, the greater the potential negative impact upon Eurozone growth which is already expected to still contract modestly in 2013. Further, he adds that the widening output gap and building spare capacity in the Eurozone is intensifying disinflation pressures with the annual rate of core Eurozone inflation declining more sharply than expected to 1.3% in January.

He adds, the release today of the inflation report for February will shed further light on inflation trends in the Eurozone. He adds, “ECB President Draghi stressed yesterday that it has no intention of tightening monetary policy anytime soon with inflation projected to “significantly” undershoot its target next year.” Hardman finishes by noting that the comments come ahead of next week’s ECB policy meeting at which the ECB staff forecasts will be updated. A further downgrade to the December midpoint inflation projections of 1.6% in 2013 and 1.4% in 2014 would increase the likelihood of further monetary easing from the ECB ahead likely weighing upon the euro.