HiFX comments this morning’s Eurozone CPI data
Andy Scott, associate director of FX advisory services at foreign currency specialists, HiFX, said: “Euro Pressured As Disinflation Accelerates
“The euro fell across the board Monday morning following the release of the Eurozone consumer price inflation data for March, which showed inflation running at just 0.5%, the lowest rate since November 2009 and lower than the 0.6% forecast. This has raised expectations that the ECB will have to take radical steps to stop deflation taking hold. The timing of such a shocking release couldn’t be more relevant given the ECB meeting this week and a string of comments from policy makers last week who feel the euro’s strength and the low disinflationary environment are directly linked and should be tackled. Comments included those from Bundesbank president Jens Weidmann, who went as far as saying that even quantitative easing wasn’t “out of the question”, signalling how serious he considers the situation to be.
“There really can be no option but for the ECB to follow their talk with policy action this Thursday as they are arguably already well behind the curve. The downwards inflation trend looks like it could continue further too as China’s vast thirst for commodity slows, putting downwards pressure on prices for energy and other resources whilst the euro is up over 7% from this time last year against the dollar, towards its highest in over two years. Whilst it is not the ECB’s policy to directly target the euro’s value, they don’t look to be left with any choice but to try and weaken it to at least stem the tide of disinflation which has set in even in Germany where inflation is now just 1%. With the economies of the Eurozone still only managing meagre growth, there’s little likelihood of significant price rises, particularly when input and producer prices are all falling so the currency seems the most effective option. There are a few options available to Draghi and his colleagues and whilst quantitative easing would be the most effective solution, this is also the least likely. Still, they wrong-footed the market in November when they cut rates to 0.25%; perhaps they’ll surprise us again in April. The biggest surprise would be if they did nothing which would likely cause the euro to rise as it did after they held policy in March and this would have the opposite effect to what they desperately need. We expect them to ease policy and the euro to fall against both the dollar and the pound, more accurately reflecting the fundamental backdrop of a weak economic recovery in the Eurozone and a monetary easing policy stance by the ECB. However, like many FX commentators we have been surprised by the euro’s resilience over the past two quarters so we remain cautious, not expecting anything too dramatic in the short-term.”