Eurozone: Can inflation drive EUR higher? - Nomura

Analysts at Nomura note that the inflation is recovering in the euro area but the reaction of EUR/USD to euro area inflation surprises has declined recently, while it is reacting more negatively to US inflation surprises which suggests that the politics and US factors are likely to dominate for now.

Key Quotes

“The short-end of the rate spread has been dominated by US factors as the ECB approaches the lower bound of its policy rate, which explains the current importance of US inflation rather than euro area inflation. In the near term, politics in the euro area and US policy developments should also be key drivers of EUR/USD, which could make EUR reactions to euro area inflation muted for now.”

“Our base case is that European political events in H1 may not increase EUR break-up risks materially. Thus, we expect the inflation recovery to be a more important driver of EUR into H2 2017 onwards, as political uncertainty eases.”