Having made strong progress over 2017 and the first few weeks of the year, the euro has since traded in a relatively narrow range.
While the eurozone’s economic recovery gathered momentum, the euro was on a seemingly unstoppable upward march.
Since the beginning of 2016 until the end of January this year, the euro gained 18% against the dollar, to stand at $1.24.
However, since then the euro has made no further progress and currently trades at slightly below $1.24.
Until recently, stories about the eurozone economy’s improving fundamentals were dominating the headlines.
As widely expected, in October the European Central Bank (ECB) revealed it would further unwind its quantitative easing programme, reducing asset purchases from the beginning of 2018 to €30bn per month from €60bn previously.
With eurozone data continuing to strengthen going into 2018, expectation was building that the ECB could even begin raising interest rates this year.
However, over the past few months the narrative has changed somewhat.
Eurozone inflation has begun to soften while other recent data from the bloc suggests that economic activity may have already peaked.
Rather than interest rate tightening then, expectations are increasing among economists that the ECB will announce a further extension to the current round of quantitative easing that is scheduled to end in September.
As 2017 drew to a close, it seemed as though the economic news on the eurozone would keep getting better throughout 2018 as well.
In December, the ECB upwardly revised its 2018 growth projection for the eurozone economy to 2.3% from its prior estimate of 1.8%.
Indeed, eurozone unemployment has continued to fall, easing to a rate of 8.5% in February, its lowest level since December 2008.
Nevertheless, eurozone inflation has been falling further away from the ECB’s 2% target, having weakened to 1.1% in February versus 1.3% in the prior month.
The recent fall in eurozone inflation by itself makes an interest rate hike from the ECB this year look highly improbable.
At the same time, much of the recent weakness in inflation can be attributed to the strong appreciation in the euro during 2017.