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Eurozone Inflation Drops to the Lowest Level Since 2009, Euro Bulls Don’t Mind

By David Maycotte
31 March 2014 10:59 GMT

Talking Points:

  • March Preliminary Eurozone CPI Falls to Lowest Level in 5 Years
  • ECB’s Weidmann says Drop in Inflation is Temporary
  • Focus Turns to European Central Bank Conference After Rate Decision Later This Week

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Release

Actual

Expected

Prior

Euro-Zone Consumer Price Index Estimate (YoY) (Mar)

0.5%

0.6%

0.8%

Euro-Zone Consumer Price Index – Core (YoY) (Mar A)

0.8%

0.8%

0.3%

Eurozone’s benchmark year-on-year inflation rate fell for the third consecutive month and to the lowest level since November 2009. Preliminary Eurozone CPIcame in worse-than-expected at 0.5 percent in March, and missing expectations calling for a print of 0.6 percent. Moreover, this marks the sixth consecutive month that inflation is below 1 percent and well below European Central Bank’s (ECB) primary objective of maintaining the benchmark inflation rate below, but close to 2 percent. The soft outcome may fuel concerns about continued disinflation and drive speculation for a near-term expansion of ECB stimulus ahead of this week’s policy announcement. However, comments by ECB’s Weidmann made ahead of the inflation release may shine a light on policy action.

ECB’s Weidmann said that the drop in inflation is mostly cyclical. He attributes the deceleration of prices to energy and unprocessed food prices, and due to their cyclical nature expects this to be only temporary. He goes on to say that the Euro-Area recovery will pull inflation back up and that the ECB should only react to 2nd-round disinflation effects. This week is a critical week for the Euro and its fate depends on the outcome of the ECB policy meeting. Currency Analyst Chris Vecchio says there are signs that funding pressures may be building. He sees a shifting fundamental outlook due to ECB’s dovish rhetoric as of late, excess liquidity dropping and putting pressure on interbank lending rates, and EONIA showing conditions of tightening - the time for ECB action may be nearing.

The Euro fell against the US Dollar but quickly rebounded, and Currency Strategist Jamie Saettele sees a multiday rally back towards 1.3865.

Eurozone-Inflation-Drops-to-the-Lowest-Level-Since-2009-Euro-Bulls-Dont-Mind_body_Picture_1.png, Eurozone Inflation Drops to the Lowest Level Since 2009, Euro Bulls Don't Mind

EUR/USD 5-minute – using FXCM Marketscope 2.0.

-- Written by David Maycotte, DailyFX Research Team. Questions, comments or concerns can be sent to dmaycotte@FXCM.com.

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31 March 2014 10:59 GMT