Euro Crumbles as Disinflation Returns

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Market Drivers Dec 2, 2015

UK Construction PMI misses
EZ Inflation cooler sending euro below 1.06
Nikkei -0.37% Eurostoxx 0.06%
Oil $41/bbl
Gold $1066/oz

Europe and Asia:
GBP PMI Construction 55.3 vs. 58.4
EUR CPI 0.9% vs. 1.1%

North America:
USD ADP 8:15

USD BOC Rate Statement 10:00

The euro crumbled in morning European trade today as EZ flash inflation data printed cooler than expected setting for further possible QE action from the ECB.

The EZ Flash CPI reading came in at 0.1% versus 0.2% on a month over month basis and slipped below 1% on yearly basis printing at 0.9% versus 1.1% forecast. The dip lower was driven by lower energy and food prices and confirmed Mr. Draghi’s comments from a few weeks ago that the core inflation in the EZ continues to weaken.

The CPI well below the ECB target of 2% and moving lower once again, the stage is set for further expansion of QE at the next monthly meeting tomorrow. Although the market has already been prepared for an aggressive policy path from the ECB, tonight’s data may spur European monetary authorities to consider even more unconventional measures in order to fight the disinflationary forces in the region.

The euro slipped below the 1.0600 level in morning European dealing and could test the recent lows of 1.0555 as the day proceeds. The downward pressure on the unit could be exacerbated by several events on this side of the Atlantic. At 12:15 GMT the ADP employment report will be released with the market looking for a healthy read of 191K from 182K the month prior.

Although recent US economic data has been disappointing with the latest ISM Manufacturing report recording its weakest reading since 2009, the labor conditions in the economy continue to show strong demand. This was true even in yesterday’s woeful manufacturing numbers. The broad consensus in the market is that as long as employment data shows strong growth the Fed will look past the recent weak results on the economic front and will proceed with normalizing monetary policy in December.

Therefore today’s ADP data as well as the speeches by Ms, Yellen could be key in confirming that thesis. If the Fed Chairwoman sticks to the script and labor data confirms her hawkishness the disparity between US and EU monetary policies will only widen and EUR/USD could set fresh lows as the day proceeds.

Boris Schlossberg
Managing Director

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