The Euro went into freefall on Tuesday after data showed that Eurozone inflation fell to its lowest level in five years, heightening concerns over deflation and puts more pressure on the European Central Bank (ECB) to introduce more stimulus measures.
According to the European Union’s Statistics Agency Eurostat, consumer prices across the 18-member currency bloc rose by just 0.3% in the year to September, a fall from the already worryingly low number of 0.4% seen in the preceding month.
The fall was widely forecast but it now means that inflation is at its lowest level since October 2009, the height of the financial crisis, and remains well below the ECB’s inflation target of just under 2%. With inflation, continuing to decline it appears that the Central Banks cut of interest rates to new record lows has not been enough to spur growth in the region.
Pressure is now likely to mount of the Central Bank to take more action at upcoming policy meetings. The use of a quantitative easing (QE) programme similar to ones used by the US Federal Reserve and Bank of England cannot be ruled out.
The announcement of such a programme is likely to come up against stiff opposition from many EU members including Germany, as they are wary over such a move.
Despite that, the ECB is widely expected to hold fire at this week’s policy meeting as it insists that the measures it made at the start of September have yet to have had much of an impact upon the Eurozone economy.
‘While it was widely forecast, today’s drop in consumer price inflation to just 0.3%. A five-year low heaps further pressure on Mario Draghi to engage in QE. I believe he will succumb to this pressure eventually, though perhaps not as soon as Thursday’s policy announcement. Stiff opposition from Germany will need to be overcome, and that will take time. Last week Draghi hinted at the prospect of QE, saying, “we stand ready to use additional unconventional instruments,’ said Ben Brettal, senior economist at Hargreaves Lansdown.
Other data released in the Eurozone showed that the number of people out of work in Germany increased more than expected and the region’s overall unemployment rate remained at 11.5% in August.
The Pound meanwhile was bolstered by the release of a report, which showed that the UK economy expanded at a faster pace than initially thought in the second quarter of the year, further highlighting the diverging trend of the UK and the Eurozone.
An inflation report out of Italy showed that the nation has now slid into deflation territory as month on month inflation fell to -0.3% and the annual rate remained at -0.1%.
Euro Exchange Rate Forecast
The markets will now be looking ahead to Wednesday’s Eurozone GDP Growth Rate and Manufacturing PMI data. Further signs of weakness in those and we can expect the Euro to slide further.
The big event of the week however comes on Thursday with the latest ECB policy meeting.
‘The ECB has done a lot already to stimulate economic activity in Europe. This week we will look for more details regarding the asset-backed securities programme and covered bond programme. We are still waiting for the big bazooka, which would be the ECB really expanding their balance sheet,’ said the chief investment officer from Saxo Bank in an interview with Bloomberg.
Euro Exchange Rate News:
[table width=”100%” colwidth=”50|50|50|50|50″ colalign=”left|left|left|left|left”]
Currency, ,Currency,Rate ,
Euro,
,US Dollar,1.2596 ,
Euro,,British Pound,0.7769 ,
Euro,,Australian Dollar,1.4448 ,
Euro,,Canadian Dollar,1.4076 ,
[/table]
