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Euro Zone Inflation to Fall Below 2%, Threatening Currency with Rate Cuts (Euro Open)

Tuesday, 06 January 2009 04:54:49 GMT  |  Ilya Spivak, Currency Analyst

The Euro Zone Consumer Price Index headlines the economic calendar in European hours, with expectations calling for inflation to slow to 1.8% in the year to December. Overnight, UK consumer confidence issued the worst print on record, adding to selling pressure on the Pound as it retraced gains against the US Dollar.

Key Overnight Developments

• UK Consumer Confidence Hits Record Low, Says Nationwide
• British Pound Retraces Gains Against US Dollar


Critical Levels



The Euro slipped lower late into the overnight session, falling towards the 1.35 level against the US dollar. The British Pound traded down as well, retracing about 50% of the rally in New York hours to test below the 1.46 mark.


Asia Session Highlights



Nationwide Consumer Confidence fell to 47 in December, the worst reading on record and the lowest in over 4 years. Consumer sentiment has been pressured lower as economic growth turned sluggish, sending unemployment higher all the while tumbling home values and stock prices produced large negative wealth effects. Private consumption is the single largest contributing factor to overall economic growth. Indeed, a survey of economists’ polled by Bloomberg suggests GDP shrink in the fourth quarter of 2008 as well as the first three months of 2009, formally confirming that the UK is in recession. This will surely see the Bank of England continue to loosen benchmark borrowing costs, with traders pricing in a 0.25% - 0.50% cut when policymakers announce rates later this week.

Related Article: British Pound Forecasts Bearish on Bank of England Rate Predictions

Euro Session: What to Expect



The initial estimate of December’s Euro Zone Consumer Price Index is set to show inflation fell to an annual rate of 1.8%, in line with the European Central Bank’s target of “below, but close to, 2%”. The pace of price growth has been close to halved since peaking with commodity prices in July. Rapidly slowing economic growth has helped considerably ease inflationary pressure. Indeed, the Euro Zone was confirmed to be in it’s first-ever recession since the inception of the single currency after GDP shrank in the second and third quarters of 2008. At this rate, prices will quickly fall below the target level, threatening deflation if the slide is left unchecked. This means Jean-Claude Trichet and company are likely to continue to slash borrowing costs, with traders currently pricing in a 25-50 basis point interest rate cut when the ECB announces policy next week.

Separately, the final revision of December’s Euro Zone Purchasing Manager Index is set to confirm business sentiment at 38.3, the lowest since records began over 3 years ago.

Related Article: Euro Tumbles on Dovish ECB Comments, Euro-zone CPI Could Exacerbate Sentiment on Tuesday



To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.

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