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Euro Ignores Worse-Than-Expected CPI Underlining Risk of Deflation

Euro Ignores Worse-Than-Expected CPI Underlining Risk of Deflation

David Maycotte,

Talking Points:

Eurozone CPI for April reported worse-than-expected as preliminary figures saw inflation rise 0.7 percent, missing expectations calling for a print of 0.8 percent. Core-CPI reported in-line with estimates at 1.0 percent. Inflation in the Euro-zone and Euro area has disappointed severely. Earlier this week, German inflation figures missed expectations for April.

Eurozone CPI.

European Central Bank (ECB) policy makers have been grappling with low-inflation as annual price changes remain below the ECB’s 2 percent target rate. Sufficiently discouraging were March inflation figures that reported at a four-year low. Aside from the inflation environment, DailyFX Currency Analyst Christopher Vecchio warns of sour developments in the euro-area.

“Interbank lending pressures are creeping up, and now the overnight lending rate (EONIA) is above that of the ECB’s main reference rate: 0.294% (EONIA) versus 0.25% (ECB main refinancing rate),” says Vecchio, “simply put, as banks continue to deleverage for AQR (stress tests) due in November, credit creation and lending activity have fallen by the wayside, holding back potential economic growth.” He says the ECB might consider a smaller rate cut going forward.

The Euro dipped immediately on the release, but instantly pared the losses to trade at 1.3829 resistance. DailyFX Technical Strategist Jamie Saettele says he is looking for a top. “This weak momentum profile is not suggestive of a strong bull (or bull at all for that matter),” says Saettele, “the failed rallies may warn of something sinister on the downside.”

EURUSD Daily chart From EURUSD Trend line Proves Worth; Moving Finally Coming?

Euro Ignores Worse-Than-Expected CPI Underlining Risk of Deflation

Chart Prepared by Jamie Saettele, CMT using FXCM Marketscope 2.0.

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

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