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EUR/USD: European April Inflation to Spark QE Speculation?

EUR/USD: European April Inflation to Spark QE Speculation?

Gregory Marks,
EUR/USD ECB April Inflation

Talking Points:

-EUR/USD at risk if ECB ‘QE’ speculation picks up on weak inflation data.

-European Central Bank members are upbeat, confident in better April data, but why?

-Draghi, Constancio ‘surprised’ by poor March inflation data.

-ECB looking at QE options, but catalyst for action/rhetoric needed.

At the April European Central Bank meeting, EUR/USD and EUR crosses faced weakness on the back of comments from Mr. Draghi that a European style ‘QE’ program was being discussed by the council. Regardless, it was made clear that a move to undertake an easing program would only be in the context of absolute necessity. What constitutes such absolute necessity is likely to be a widely debated topic over the next 8 weeks, especially if April and May inflation come in below targets and expectations.

ECB officials have come out and stated that they were ‘surprised’ by March inflation data. In the context of five year seasonality studies, the council may be once against surprised in the second quarter of 2014. While ICE Brent crude is usually supported in March, the commodity is already down 3% year-to-date. If it continues to follow April/May trends, lower energy prices would contribute further to downside price levels in the Eurozone. Although these correlation studies are simple and straightforward metrics, expecting higher prices in April (as the ECB does) would be going directly against post-crisis averages.

Five Year Avg. Study: CPI to Disappoint Draghi in April?

EUR/USD Oil Comparison

Of course it would be irresponsible to discount risks in regards to higher natural gas prices on any further escalation with Ukraine and Russia. Nevertheless, as we approach summer the warmer weather across Europe will lessen any impact of higher natural gas prices.

EUR/USD News: Detailed Seasonality Snapshot

Euro Dollar Rate Chart

Gregory Marks, DailyFX Research Team

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