EUR/USD Fundamental Forecast – February 1, 2016

The EUR/USD slipped 18 points after the release of Eurozone inflation data and weak German retail sales. The US dollar soared today as oil prices continued to rally. Euro zone inflation ticked up in January, only modest relief for the European Central Bank which is still likely to cut rates again as price growth could turn negative by the spring and lending suffered an unexpected setback.
Inflation has hovered near zero for more than a year, well short of the central bank's near 2 percent target, and ECB President Mario Draghi has already said another package of policy easing could be unveiled as soon as March. Headline inflation, the main indicator watched by the ECB, rose to 0.4 percent from 0.2 percent while core inflation, which strips out volatile food and energy prices, rose to 1 percent from 0.9 percent, reversing the previous month's fall.
Indeed, Jens Weidmann, the Bundesbank's influential president warned on Thursday that inflation forecasts for this year must be significantly reduced and numbers could turn negative in the months ahead.
The greenback took off in mid-2014, as investors braced for higher U.S. interest rates and commodity prices led by oil entered a sharp new downturn. The Dollar Index, which measures the U.S. currency against a trade-weighted basket of other currencies, surged 22% between July 1, 2014, and March 17, 2015. The index has since risen a further 2.7%, the data show.
The dollar fell broadly on Thursday as a plunge in U.S. durable goods orders supported the view of weakening U.S. growth due to softer global demand, which may cause the Federal Reserve to raise interest rates at a slower pace than it had previously signaled.
The much weaker-than-expected reading in durable goods orders, which fell by the most since August 2014, raised the prospects of a lower-than-expected U.S. gross domestic product number on Friday.
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