Forex Weekly Report

Recently, the renewed optimism stemming from the burgeoning recovery in the Eurozone and the stabilisation of nominal wages, coupled with lower inflation suggest that demand-driven deflation pressures are receding. However, given the high unemployment in Eurozone, higher GDP growth is unlikely to directly lead to higher wage growth. Furthermore, inflation stemming from energy prices is likely to remain subdued at best, indicating that a return of inflation to the ECB’s target in the next two years will be rather difficult. As a result, the ECB’s new inflation forecast could be lowered, reflecting the aforementioned factors and leading to a further easing from the ECB.