Deflation in Eurozone? Euro Feels the Pressure

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Market Drivers for January 31, 2014
EZ CPI at 0.7% vs. 0.9% as new deflation fears loom
German Retail Sales miss as well -2.4% vs. 0.2% eyed
Nikkei -2.45% Europe 0.40%
Oil $98/bbl
Gold $1242/oz.

Europe and Asia:
EUR GE Retail Sales -2.4% vs. 0.2%
EUR CPI 0.7% vs. 0.9%

North America:
USD Chicago PMI 9:45 AM
USD U of M 9:55 AM

The euro came under renewed pressure in morning European trade today after inflation data from the Eurozone showed further disinflationary pressure in the region reviving fears that the ECB may be forced to consider negative rates at its next meeting in February. The EZ CPI printed at 0.7% versus 0.9% eyed – the second month in a row that the price index has surprised to the downside. Downward pressures were caused mainly by lower energy costs which dropped by -1.2%. The core CPI actually ticked up to 0.8% from 0.7% forecast.

Although ECB officials have steadfastly asserted that the declines in the price levels are temporary, the economic evidence is to the contrary as EZ CPI data has remained under the 1% mark for the past four months indicating that deflationary forces are taking hold in the region. Most troubling of all is the fact that lack of demand has created stagnant employment conditions for most of the EZ periphery.

Today’s EZ Unemployment rate printed at 12.0% versus 12.1% but all of the improvement was in Germany – which continues to vastly outperform the rest of the European union. Yet even in Germany final demand was surprisingly weak. Today’s German retail sales printed at -2.4% versus 0.2% projected indicating that even in EZ’s strongest economy the consumer remains highly cautious.

Although the uptick in core CPI numbers may provide some solace to euro bulls the fact of the matter is that price pressures in the region remain depressed, demand is subdued and growth is tepid at best. The pressure on the ECB to stimulate demand is likely to increase especially if the current turmoil in emerging market economies begins to have negative spillover effects for the export dependent EZ region.

The EUR/USD dipped to a low of 1.3517 in the wake of the CPI data, but so far has managed to hold the key 1.3500 level in relatively quiet London trade, marked by a semi-holiday mood due to the Chinese New Year. Still as North America comes on line the pair could see further downside pressure with shorts likely making another run at the 1.3500 barrier.

In North America the calendar is relatively light, but traders will look carefully at the Canadian GDP data expected to come in at 0.2%. If the number misses to the downside it could push the USD/CAD pair through the seminal 1.1200 level as the loonie weakness continues. In US the focus will turn to Chicago PMI and the U of M data as traders seek confirmation that US recovery is maintaining its momentum. If the numbers miss then USD/JPY which has been drifting lower all night long may test the 102.00 barrier once again.

Boris Schlossberg
Managing Director

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