The euro has opened sharply lower against the British pound ahead of what is expected to be policy-shaping inflation data from the eurozone. The key focus for eurozone central bankers remains significantly below target and another worrying report about price levels could force President Mario Draghi to sanction further monetary easing at the European Central Bank’s meeting next week. The pound is currently one of main beneficiaries of the euro’s slide and is also trading within striking distance of a recent four-year high against the US dollar. Comments from the Federal Reserve’s Janet Yellen about low interest rates weighed on the US dollar but the crisis in Ukraine is still providing the US currency with safe haven support.

Euro

The euro has lost over one per cent of its value against the sterling this week and is in danger of sinking further after weaker inflation numbers in Germany and no inflation in Spain increased the risk of another interest rate cut from the European Central Bank. Analysts on average forecast inflation across the euro area, the main focus for ECB policy, to fall from 0.8 per cent (y/y) to 0.7 per cent in February.

Sterling

Positive UK GDP figures earlier this week gave the sterling a solid platform from which to advance against both the US dollar and euro ahead of the crucial eurozone inflation data. The pound is now back within striking distance of four-year highs against the US dollar after Janet Yellen, Federal Reserve chairwoman, reaffirmed that US rates will remain low for longer given weaker inflation levels in the economy. The sterling is also just 0.5 per cent away from retesting one-year peaks against the euro amid fears that weak eurozone price data will push the European Central Bank into another interest rate cut next week.

US dollar

The US dollar touched a fresh, two-week high against the euro but then fell away sharply in the North American trading session after more weak US economic data and comments from the Federal Reserve weighed on the greenback. The US dollar had extended its rise this week from safe haven demand amid fears of an even bigger crisis developing in Ukraine with Russia reportedly preparing for military action. The US dollar declined after data on US durable goods showed a one per cent drop (m/m) in January following on from a 5.3 per cent decline a month earlier.

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