EURO Zone Deflation Fears Rise As Inflation Falls!

Last month, ECB President Mario Draghi took unprecedented step when he made the deposit rate negative for the first time in an effort to fight off the deflationary fears. EUR/USD jumped up more than 150 pips to around 1.37000 level and then started falling. It has been falling since then. But analysts had voiced concerns over the effectiveness and efficacy of ECB Monetary Policy. It seems that the analysts had been right. Deflationary pressures are on the rise again. Always keep in mind there is always a lag of a few weeks to a few months before the full effects of a monetary policy change becomes visible. As a EUR/USD trader, we need to constantly keep an eye on ECB.

The European Central Bank (ECB) sees inflation as a key metric in gauging the state of the euro zone, and announced a slew of measures back in June to try to spur on the region’s flagging economy. Many analysts fear deflation could lead to a downward spiral, with consumers holding off on purchases in the expectation that prices could fall further. Others see deflation as a natural rebalancing within the region, believing that consumer prices need to slide to counterbalance an overly-strong euro. Draghi may be forced to act soon again. He can no longer make the argument that we need time for the measures already taken to fully take effect. So keep an eye. In the next ECB Press Conference, EUR/USD can move big time once again.

“The euro is under pressure,” Ian Stannard, the head of European foreign-exchange strategy at Morgan Stanley in London, said in a July 29 phone interview. “Portfolio flows have started to slow down into Europe as yield differentials have come right down.”

If you are a EUR/USD trader, you should keep an eye on the European Central Bank (ECB). You should know what ECB is doing right now and what it plans to do in the future. EUR/USD is a pair that only moves when ECB wants it to move. The other force that can move EUR/USD is of course the Federal Reserve Bank of USA. Both these central banks hold sway over EUR/USD. ECB has announced a policy of Quantitative Easing also known as QE. ECB announced a few months back that it will continue with QE in 2017. What this means? It only means that ECB wants to keep EURO weak. This helps the European economy. Did you read the post on NZD/USD carry trade that is unraveling due to lower milk price?

0 Comments