Businesses await further ECB stimulus as Eurozone inflation falls into negative territory
01/Mar/2016 • Currency Updates•
Inflation in the Euro-area economy plunged back into negative territory in February, for the first time since September last year. Is this the beginning of a GBP/EUR retrace? Businesses that sell Euros will certainly be looking at this keenly.
The news sent the Euro lower across the board yesterday. Headline consumer prices declined by 0.2% on an annualised basis, well below the flat reading expected, with falling energy costs continuing to provide a sizable drag.
Monday’s data will undoubtedly heap further pressure on the European Central Bank to increase its monetary stimulus measures at its meeting next week.
Such an underwhelming inflation print reinforces our opinion that the Governing Council is now all but certain to cut its deposit rate deeper into negative territory, with the possibility of further quantitative easing, when it meets on 10 March. These moves could be the catalyst to reverse some of the recent Euro strengthening.
Let’s start the discussion on Twitter now – simply use the hashtag #EburyChat16. I’ll be hosting a Twitter chat with Dan Davies, Senior Research Advisor at Frontline Analysts, and my colleague Enrique Diaz-Alvarez during the press conference following the ECB Governing Council meeting.
The safe-haven Japanese Yen recommenced its recent appreciating trend, rallying by over 1% against the Greenback after comments from the G20 meeting failed to ease fears about global growth prospects.
Better than expected growth figures also sent the Swedish Krona to a four-week high against the Euro.
In emerging markets, the South African Rand strengthened by the most in the world on Monday after the country’s Prime Minister Jacob Zuma dismissed reports suggesting their Finance Minister was under threat.
The Chinese Yuan also fell to a three-week low against the US Dollar after the People’s Bank of China cut its reserve requirements for the fifth time in 12 months, this time by 0.5%.
Concerns surrounding the UK’s EU referendum will no doubt continue to dominate trading this week. This Friday’s US labour report, including the nonfarm payroll release, will also be of high importance.
Leading into next week’s ECB meeting we are expecting to see a large amount of volatility.
Major currencies in detail:
Sterling had some respite yesterday following its recent battering, ending 0.2% higher against the US Dollar and a massive 0.9% up versus the Euro.
Brexit worries limited gains for the Pound yesterday, although it received modest headwinds from encouraging lending and housing figures.
Mortgage approvals in the UK surged unexpectedly to a two -year high in January, increasing to just shy of 75,000. Meanwhile, consumer credit, which measures the amount of money borrowed in the previous month, accelerated to its fastest pace since January 2006, growing by 9.1%.
The latest manufacturing PMI from Markit is expected to slow when released this morning. The domestic economic calendar this week is relatively light, with Friday’s inflation expectations the main focal point for the Pound.
The Euro continued its recent downward trajectory against the US Dollar yesterday, falling by 0.75% and extending its losses to over 4% since mid-February.
Price growth has continued to worsen in the Eurozone, despite the ECB’s already large-scale asset purchasing programme. In tandem with the underwhelming headline print, core inflation also fell to 0.7% from 1.0%, according to Eurostat, its lowest level since April last year.
Economic data out of Germany was similarly disappointing. Retail sales plunged by 0.8% on an annualised basis, marking its largest decline in over year, while import prices fell by a massive 3.8% in the year to January.
German unemployment data is the focus in the Eurozone today, although traders will have one eye on next week’s ECB meeting.
Strong gains against the Euro caused the US Dollar index to climb by 0.5% yesterday.
Announcements out of the US economy on Monday were relatively light on the ground, with investors awaiting this Friday’s labour report for clues over the health of the country’s labour market.
A strong nonfarm payrolls reading around the 200,000 level could bring forward expectations for the next interest rate hike in the US, which is currently not priced in by the markets until December.
In terms of economic data, pending home sales took a downturn, falling by 2.5% in the month to January and growing by just 1.4% on an annualised basis, its slowest growth since September 2014. Manufacturing growth in the Chicago area also disappointed, with the latest PMI falling to 47.6 and back into contraction.
US manufacturing data this afternoon is expected to show a fourth straight monthly decline when released at 15:00 UK time today.
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