02.03.202109:36 Forex Analysis & Reviews: Is inflation a disadvantage for the euro?

Europe is thinking about strengthening the inflationary mood. In the United States, this was already settled in the form of aiming to reach the 2% target level. European leaders wanted to do the same, but the path to reach it is difficult.

Experts are concerned that inflation and all that is associated with it, will negatively affect the Euro currency, as the US currency once did. At the moment, the USD is actively strengthening, despite the accompanying difficulties. On Tuesday, it is gaining impulse due to encouraging US statistics and positive changes regarding the $1.9 trillion stimulus package. According to the American Institute for Supply Management (ISM) report, the index of business activity in the national industry rose to a three-year high of 60.8% last month. Experts highlighted that this is much higher compared to the January figure of 58.7%, against the forecasted growth of 58.8%.

The current macro statistics expected today in the Eurozone, which includes an estimate of annual inflation, is very important for the Euro currency. This significantly affects its dynamics, along with the Fed and ECB's actions. Like the US, the European Central Bank is afraid of rising yields on its territory, as well as excessive strengthening of the national currency. Earlier, Christine Lagarde, ECB Chairman, expressed concerns about the strong euro. The Fed has similar concerns about the US dollar. Many experts believe that the current growth of the greenback is a time bomb that carries a potential threat to the economy.

According to analysts, inflation is a key topic of macroeconomics and significantly affects the dynamics of markets. It becomes the center of attraction for almost all economic processes. Earlier, the surge in inflation in the euro area coincided with a slowdown in the euro. Now, experts believe that the growth of inflationary sentiment will be a disadvantage for the Euro, which will possibly push it to the bottom.

Against this background, there is a constant struggle for leadership in the EUR/USD pair. Today, the US dollar is in the lead, which pushed the Euro, which awaits for EU statistics. On the morning of March 2, the EUR/USD pair was moving in the 1.2025-1.2026 range, heading towards new peaks.

One of the key objectives of the current monetary policy is to accelerate inflation. Experts emphasized that the ECB is confused by this issue. According to Lagarde, the regulator is aware of all the things that are happening both in relation to inflation and to the euro exchange rate. She stressed that euro's growth against the dollar is an extremely undesirable phenomenon for the EUR/USD pair.

The factors that will accelerate inflation in the euro area are extremely low interest rates (near zero) and the expansion of the ECB's balance sheet through the quantitative easing (QE) program. Analysts say that this allows the ECB to successfully solve current problems. In view of rising inflation expectations in the euro area, inflationary processes are gaining momentum. As for the United States, similar actions were recorded, strengthening the inflation expectations, which now stands at 2.4%.

If the growth rate of European inflation exceeds the US one, the EUR/USD pair will continue to decline. According to experts, the current inflation growth does not prove the strength of the economy, but a threat to the purchasing power of key currencies. There will only be positive changes in case of a reversal in the regulators' monetary policy, but this is unlikely in the near future.