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Updated 11:54 25/06/19

Draghi: Inflation in the Eurozone to rise

Liam Sheasby

By Liam Sheasby, News Editor

26 Sep 2018

Mario Draghi, pictured above, believes the Eurozone will experience a clear inflation rise in the coming months.

The Euro is making gains against the US Dollar this week following comments the President of the European Central Bank (ECB), Mario Draghi, made to senior officials in Brussels. Mr Draghi stated that inflation is set to rise in the Eurozone, the response of which was the Euro hitting a three-month high of $1.1815 on Monday afternoon. The Euro is currently valued at $1.1741.

President Draghi spoke at a hearing for the Economic and Monetary Affairs of the European Parliament. The Italian economist told ministers: “Underlying inflation is expected to increase further over the coming months as the tightening labour market is pushing up wage growth.”

The ECB already announced that interest rates would remain unchanged earlier in September, which has kept the value of the Euro quite flat, and Draghi promised to keep rates minimal “through the summer” of 2019.

The latest gains for the Euro coincide with the US Dollar remaining flat ahead of tonight’s Federal Reserve announcement (7pm BST). Criticism of rate rises by President Trump may be enough to deter the Fed from opting for another rate rise, so investors – many of whom expect another rise – are not willing to commit and back the US Dollar until confirmed.

John Doyle, Director of Markets at Tempus Consulting in Washington D.C, believes that Draghi’s comments are a tell-tale sign that other economies are beginning to mobilise against the threat of inflation like the Federal Reserve has.

"The idea of divergence between the Fed tightening and other central banks either on hold or cutting rates is not there to support the dollar anymore" he said.

The ECB tried to downplay Draghi’s comments, with Chief Economist Peter Praet saying that there was nothing new about what he had told officials and journalists, but the Euro’s value stood strong against the Dollar, only falling back a fraction of a percent.

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Trade war could benefit the Euro, says Deutsche Bank

As the Euro gains ground on the Dollar, Deutsche Bank weighed in to support the Euro by claiming that the US/China trade war could be a big boost for the Eurozone economy.

It may sound odd that the EU would benefit from the dispute, given the threat of both China and the USA trying to sell their tariffed goods to the European market to avoid their taxations, as well as the fact that the Dollar is stronger than the Euro and more enticing for investors. Further still, German manufacturing data is down because of the dispute. That’s a short-term inconvenience if Deutsche Bank are to be believed. Speaking to Bloomberg News and their clients, Deutsche Bank said that the EU would benefit from America substituting in European goods over Chinese products.

“The US-led trade war on China may end up benefiting the Euro disproportionately by diverting trade toward Europe” said George Saravelos, Co-head of Foreign-Exchange Research at Deutsche Bank. “It ultimately reflects a more favourable view of the European versus China cycle.”

There is risk involved with the Eurozone exporting more to America however. President Trump has been critical of the Euro in the past, arguing it is undervalued, and a lot of the disagreements with China for the current trade war stem from the trade deficit the US has with China. If the EU starts sending more and more goods stateside then the US will perhaps have a similar deficit with Europe, which might cause tension of its own.

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