Euro zone futhering business climate
David Kohl, Chief Currency Strategist, Julius Baer
The preliminary March readings of the purchasing managers’ index in Germany, France and the Euro zone delivered positive surprises. The positive data should allow the speculation about an earlier end to the negative deposit rates to gain traction. We expect Euro zone growth to have accelerated in the first three months of the year to 0.6 per cent q/q after 0.4 per cent in the last quarter of 2016. The full-year consensus of gross domestic product growth estimate (1.6 per cent) for 2017 appears fully justified given the high degree of business optimism. Despite the encouraging growth backdrop, the Euro zone is far from overheating allowing the European Central Bank (ECB) to remain committed to the zero main refinancing rate. The preliminary inflation rate for March - which will be released later this week - has likely declined, highlighting the transitory nature of the most recent inflation pick-up.
We expect the ECB to allow further speculation about a less pronounced negative deposit rate. The ECB had indeed moved the deposit rate without changing the main refinancing rate in the past – the last cut (10 basis points) was undertaken in December 2015. We upgraded our EUR/USD forecast slightly on the back of the growing probability that the deposit rate will be changed from minus 0.4 per cent to minus 0.3 per cent this year. We forecast EUR/USD at 1.08 in three months and stick to our 12-month outlook of 1.07. The new forecast implies a neutral to slightly constructive qualitative view for the euro and a growing conviction for a strong Japanese yen. The yen strength should be temporary since the Bank of Japan remains committed to its negative interest rate policy and continues to target bond yields close to zero per cent.