- European inflation declines driving EUR lower
- ECB has three options for QE
- Germany to have say on final fate of QE
Falling oil prices, political uncertainty in Greece reigniting the austerity debate, and low inflation keep driving the EUR/USD to multi-year lows. The release of the nonfarm payrolls (NFP) report in the United States failed to fuel the USD rally. While the number of new jobs beat expectations and the overall unemployment rate went down, the Federal Reserve has already said it won’t base its rate setting decision on those numbers. Instead, it’s looking at overall recovery and wage growth. It is precisely wages that disappointed as they contracted in December and helped the EUR/USD remain above $1.18.
Consumer prices fell into negative territory in the eurozone in December. The decline in energy prices drove the consumer price index to 0.2% lower reading. The expectation was for a lower drop but deflation was already priced it as there have been multiple indicators signalling this outcome. The lack of consensus in Europe regarding the next step in monetary action has the European Central Bank (ECB) with plenty of ideas, but no real options to try to stave off deflation via a stimulus program.
The German Chancellor, Angela Merkel, and the head of Germany’s central bank Jens Weidmann both stated this week that they would not go along with a quantitative easing (QE) program that includes sovereign debt. This has some analysts speculating that there can be three options available to the ECB:
- Buy sovereign bonds prorated to the member’s nation share of the central bank
- Buy only AAA rated government bonds
- Allow eurozone member states’ central banks to buy AAA rated government bonds
Germany stands in the way of most of the options as they are unlikely to agree to buying risky debt, even if only as prorated by membership into the European Union. Germany enjoys AAA status, but it has made clear that it won’t enter into an expansionary policy leaving out option three, as Germany won’t buy its own bonds. There could be little objection to the ECB buying German bonds, but the desired outcome is lessened as it could not have a trickledown effect to other members’ economies.
Next week in Europe
Last week, the FX market was full of big releases. Next week will not be as action packed. The European Court decision has the potential to move the market the most if there is an unexpected outcome to the ruling on the legality of European Stability Mechanism. In Asia, Chinese new loans data will be reported. Analysts have begun to anticipate a Chinese credit crunch. Meanwhile, Australia will report its employment statistics. Last month’s data surprised to the upside in the number of jobs, but a warning in the low number of hours worked. Analysts will be waiting to dig in to the official data for further proof of the Australian employment recovery.
With little data releases before then to guide it, the market will be eagerly awaiting the next ECB meeting scheduled for January 22. The pressure keeps piling on ECB chief Mario Draghi to launch a QE program, but the Germans are likely to make the program lower in impact if they get their way to not include sovereign debt with a low rating.
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