EUR: Deflation Still A Non-Issue?

With the worsening Ukraine crisis unable to derail any euro-economic objectives, expect another unpredictable trading day as investors watch the European Central Bank (ECB) do nil though evidence of European deflation grows.

Furthermore, yesterday’s weak German ZEW reading suggests that Germany’s investors have begun to scale down some of their bullish expectations. In Mario Draghi’s kingdom, no doubt hands are wringing over what to do about Russia and Ukraine. The eurozone has tight trade relations with the former and any further sanctions will have a negative blowback effect on Europe, especially on Germany, the currency bloc’s biggest and strongest economy.

ECB All Talk and No Action

Draghi, the European Central Bank’s (ECB) president, is wise to take a dovish position. The threat of deflation is spreading across Europe and it is not confined to the 18 nations that share the EUR. This morning’s consumer-price index for the 28-member European Union rose at the slowest pace in more than four years in the 12 months to March (+0.6%). For all single-currency states, prices were +0.9% higher than in February, and +0.5% higher than in the same month last year. The core rate, which excludes food and energy, fell to +0.7% in March from +1% in February.

Despite this proof, the ECB is adamant that the European situation is nothing like what befell Japan. The ECB believes it has and is acting more aggressively than the Bank of Japan did in days past. The long-suffering EUR bear might say otherwise. Every time the single currency seems to be on the cusp of a market breakdown, support magically reappears. The bears would not disagree with some more dovish actions in current conditions – it would suit the majority of the market’s short-EUR positions.

Investors will continue to sit and wait for the ECB to use proactive measures — Draghi and ECB officials currently prefer to use rhetoric rather than monetary tools to combat the worrying effects of lower prices. For the time being, EUR shorts have to sit tight and listen to the ECB attempt to talk its currency down from such lofty heights.

U.K. Unemployment Rate Falls Again

It’s a good thing the Bank of England (BoE) isn’t in the fortune-telling business when it comes to forecasting U.K. unemployment data. This morning’s unemployment rate for the country over the three months to February dropped to +6.9% from +7.2%, the lowest level in five years. The headline message was much stronger-than-expected (+7.1%) and is now lower than the initial level originally pegged by Governor Mark Carney (+7%) at which the BoE would consider tightening monetary policy. The sterling market has reacted to the headline print and not the details. GBP initially spiked higher to a new two-month high ($1.6820) after the employment picture continued its improvement. But the pound has since moved lower now that some of the initial euphoria has worn off.

Stateside, expect investors to look to key data releases out of the U.S. this morning for more solid guidance. Housing starts, building permits, and industrial production are the key releases, while the Federal Reserve’s Beige Book – released this afternoon — may provide insight on how the American economy is truly faring.

Also noteworthy, Fed Chair Janet Yellen will give a speech on monetary policy later this morning at the Economic Club of New York. Investors will be listening for clues on her thoughts concerning the health of the labor market, inflation, and safeguarding the stability of the financial system following her remarks yesterday at a conference hosted by the Atlanta Federal Reserve Bank.

Other Link:
When Is The EUR To Choke?

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