Week In FX Europe – Can Draghi Defend His Deflation Views With Gusto Again?

Deflation remains the ECB’s nemesis and the pressure has piled again on Euro policy makers after Friday’s disappointing headline consumer price print. The annual rate of inflation for the 18-members that share the single currency, the EUR, fell to a new record low in January, with flash CPI, y/y falling to +0.7% from Decembers +0.8%. Analysts had expected an uptick to +0.9%.

With a print like this the market will expect the ECB to be more proactive. Draghi and company last cut rates in November when their annual rate of inflation fell to +0.7% from +1.1% m/m, and further away from their target just below the psychological +2% level.

Falling prices or low inflation will hinder the regions recovery from its long debt and banking crisis. Even worse, it could push the EUR members into a deflation atmosphere where prices actually fall as consumers delay their future consumption and investment needs. A lengthy period of falling prices will only further damage the Euro-zone tentative progress. Already Governments and households are struggling to finance their current debt load and when prices fall that effective “fixed” debt burden rises.

Some will argue that there are some tentative signs, like falling employment (Jan. +12% vs. +12.1% m/m) that consumer spending will rise over the coming months. But, will it be strong enough to support prices? That is the question facing the ECB. Can Draghi continue to voice with the same confidence that deflation won’t be visiting the currency bloc? Consumer price reports like this will keep the debate alive. Expect a chorus of individuals to ask for more additional stimulus to help the struggling periphery. Next weeks ECB rate announcement will make for interesting reading.

Europe’s backbone Germany is not making it any easier for Euro policymakers. German retail sales on Friday fell -2.5% in December, and easily wiped out the previous months gain of +0.9% in November. On a positive note, it does tend to be a volatile number. Friday’s headline print is in stark contrast to other recent positive reports. January’s German unemployment fell sharply, consumer confidence is on the rise and inflation remains relatively low – these are all positive that could lead to increase household spending and be a GDP plus.


* USD ISM Manufacturing
* AUD Reserve Bank of Australia Rate Decision
* NZD Unemployment Rate
* GBP Bank of England Rate Decision
* EUR European Central Bank Rate Decision
* USD Change in Non-farm Payrolls
* CAD Unemployment Rate
* GBP Gross Domestic Product Estimate

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell