'EURINR likely to move higher towards the 82 mark in two-month time'

Vaqarjaved Khan

The pair of EURUSD has been under a lot of pressure since the start of 2019 on account of continued strength in the dollar, the pair has weakened by nearly 1 percent on account of trade war concerns and weak macro-economic data from the shared bloc.

Moreover, the US dollar index has strengthened nearly 0.5 percent in the same time frame. In line with its international counterpart, EURINR has appreciated around 2 percent during the same time frame.

Slowdown in the bloc weighed heavily on Euro

Inflation in Eurozone was around 2 percent, the target set by the European Central Bank (ECB). However, CPI inflation in the euro has been continuously declining since the start of 2019. After touching a peak of 2.2 percent in November 2018, the trend has been declining and the CPI data for June 2019 came in at 1.2 percent.

In order to boost inflation in the European Union (EU) area, ECB had started the bond buyback program in 2015 with a monthly purchase of 60 billion euros. With inflation catching up in the economy since the advent of the buyback program, the central bank decided to reduce monthly purchases to 30 billion euros from January 2018 and further reduced the monthly purchases to 15 billion euros in September 2018. The central bank finally ended the purchases in December 2018 with a forecast to increase interest rates in the summer of 2019.

However, in the most recent meeting, the ECB Chairperson Mario Draghi has cited that muted inflation and growth is not just a one-off event but a major concern for the union. He hinted that in order to tackle this muted inflation, a rate cut or resumption of the bond buyback program may be used by the central bank.

In 2018, the strength in the US dollar was on account of optimistic data sets from the US. US Core inflation was consistently above the 2 percent target set by the US Fed. In 2018, the US Fed was able to increase interest rates by 25 bps four times during the year that increased the demand for the US dollar heavily. However, half of 2019 has gone by and the outlook looks gloomy for US dollar as the FOMC cites that a rate cut might be required by the end of 2019 in order to boost the US economy.

Outlook

On the global front, the US-China trade war is creating problems for nations across the globe but a possible meeting between US President Donald Trump and Xi Jinping in the G20 (scheduled on June 28-29) is likely on the cards.

Meanwhile, US Federal Reserve in its latest meeting changed tone to dovish with a possibility of rate cute later down the year. Officials have also dropped the word 'patience' that implies trimming down interest rates going ahead.

US Fed is likely to cut interest rates in the times ahead, which will weaken the dollar and strengthen the euro. However, ECB also hinted of a possible rate cut going ahead or reintroduction of a new stimulus to boost up the economy. A rate cut or additional stimulus might act as a risk to the view and may weigh heavily on euro.

Hence, EURINR (CMP: 79.13) is likely to move higher towards the 82 mark in two months’ time frame.

The author is Research Associate at Angel Broking.