The EURUSD has had a rough start to the year, trending lower since trading started on January 1st. A combination of factors has weighed on the shared currency, but upcoming data could reverse the trend as investors closely monitor the economy. the ECB bank is widely expected to remain on the sidelines for most, if not all, of this year, which means data releases could have a larger impact on the currency pair.

On Friday, the Eurozone manufacturing PMI for December came in below estimates and registered the worst reading in 9 months. The result challenged forecasts that the Euro economy would grow this year, a key element to expectations that the ECB wouldn’t cut rates again. Analysts noted declining demand and falling backlogs, indicating that businesses are exercising caution, which in turn could mean a slowdown for the world’s largest economy.
 

Getting Back to a Good Place

If inflation figures released on Wednesday match expectations, the market might view the PMI figures as an outlier and express relief that things are going to plan. The ECB reiterated last month that inflation and monetary policy were in a “good place,” a stance that relies on CPI staying near the 2.0% target.

Analysts’ consensus is that December Eurozone CPI will fall back to 2.0% from 2.1% a month earlier. However, the core rate is projected to remain elevated at 2.4%, unchanged since November. The focus will likely be on the services sector, as ECB President Christine Lagarde highlighted it as a region of concern at the last monetary policy meeting. Services inflation has been well above target, and its trajectory will likely determine whether the ECB bank stays pat or intervenes to control prices.
 

The ECB Has Been Busy During The Holidays

There haven’t been any public remarks from prominent ECB officials since before Christmas, leaving markets without updated guidance. But that doesn’t mean there hasn’t been plenty of activity at the shared central bank, some of which could have significant implications for the currency. The EC approved the central bank’s initiative to move toward a digital currency on 24 December, but it now faces a test in the EU Parliament.

On January 1st, Bulgaria officially joined the Eurozone, the latest country to adopt the currency, raising a couple of considerations. The Balkan country has been experiencing political instability since its government resigned amid anti-corruption protests in mid-December. Bulgarians will again head to the polls for the eighth time in just five years.
 

Shifting Power Dynamics in Frankfurt

Another Eastern European country joining the Euro has renewed pressure on the bloc to increase its representation on the Executive Council, which has been composed of Western countries since the Euro began. Although a growing number, Eastern countries represent just 7% of the shared economy’s GDP.

Pressure from the East could introduce a new factor into the delicate power-sharing among the countries represented in the ECB bank, which aims to achieve gender equity while balancing the interests of both larger and smaller countries. Spain’s Luis de Guindos’ post as Vice President is up for election in May, with Portugal’s Mario Centeno seen as the favorite to replace him. Both are generally understood to be dovish, representing the accommodative policy-friendly “south” compared to the more hawkish “north”. Now, analysts may need to account for an “east” faction that is less consistent in its policy direction.

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