On Thursday the Euro to Pound Sterling (EUR/GBP) exchange rate weakened further as factory orders data out of Germany and poor economic sentiment data from the wider 19-member Eurozone put more pressure on the European Central Bank (ECB) to introduce more monetary easing measures at its January policy meeting.
The Euro to Pound Sterling (EUR/GBP) exchange rate weakened on Wednesday after data released by Eurostat showed that the inflation rate in the Eurozone dipped into negative territory for the first in more than five years as oil prices tumbled.
Harmonised Consumer prices across the 19-member currency bloc dropped more than forecast in December as falling oil prices led to a dramatic drop in the cost of energy.
Eurostat said that inflation across the region fell to -0.2% on a year on year basis and was down from the 0.3% annual figure recorded in November. The last time inflation fell into negative territory was October 2009. Economists had been expecting a narrower decline of -0.1%.
The figure adds to pressure on the European Central Bank (ECB) to introduce fresh monetary stimulus measures.
Speculation is building that the ECB could announce a full scale quantitative easing programme at its January 22 policy meeting.
‘Inflation will most likely fall even further in January and remain extremely low all year long. We expect the ECB to announce a broad-based asset-purchase programme including government bonds,’ said Evelyn Herrmann, European economist from BNP Paribas SA.
Core inflation, which strips out volatile measures such as food and energy prices, rose to 0.8%, preventing further sharp losses for the single currency. Despite that, inflation remains well below the ECB’s target rate of just under 2%.
‘Alarming lack of foresight from the ECB’
Oil prices may have dropped sharply but some economists are arguing that oil is not the sole cause of the Eurozone’s slide into negative inflation.
‘Although oil is a convenient scapegoat for those policymakers that believe that the weakness in prices is transitory the lack of willingness on the part of ECB policymakers to actively engage in a scheme to help promote demand in the Euro area is the ultimate harvest that has been reaped. What today’s number has done is show the alarming lack of foresight that the ECB has exercised once again, and how close to the fire the European economy remains,’ said Jeremy Cook, chief economist from World First.
Deflation is far more dangerous than runaway inflation as it far more difficult to reverse. Fears are building that the Eurozone is heading towards a similar situation to that experienced by Japan in the 1990s.
Eurozone Unemployment Holds Steady, Italy sees jobless rate hit new record high
A separate report also published by Eurostat showed that unemployment across the Eurozone remains painfully high and remains unchanged at 11.5% in November. For the wider European Union unemployment inched lower to 10%.
Data out of Italy showed that the nation’s jobless rate increased to a new record high in November. The official unemployment rate surged to 13.4%. The unemployment rate for those aged 15 to 24 rose to 43.9% in November.
With deflation, now looking like a certainty and a way of life for some time to come economists are also raising their bets that the region could slide back into recession, as the pace of growth is insufficient to improve the labour market or create inflationary pressures.
The Euro could claw back some ground against the Pound on Thursday if the latest Eurozone retail sales and sentiment data comes in positively. The UK currency meanwhile will likely see volatility due to the Bank of England announcing its latest interest rate decision.
Euro Exchange Rate News:
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