The ECB Promises To Counter Deflation

The ECB Promises To Counter Deflation
November 9, 2014

The ECB (European Central Bank) didn’t announce anything new last week. They only told us that they were going to take the necessary measures, if needed, to counter deflation. This includes quantitative easing – even though this is not possible in Europe at this time.

We felt the press conference Mr. Draghi held was actually rather bullish, and we explain a little more about the reasons why in the space beow:

  • Europe is now one of the few places in the world (if not the only one) with a strong current account surplus. This should be a very bullish thing to take into consideration when one is analyzing the future of the euro as a currency. This has been actually reiterated by some ECB members, especially Germany, stating that a lower Euro together with a strong current account surplus is not really going hand in hand. Mr Draghi did not cover this issue at this meeting, moreover, ignored the only question related to it and focused instead of more easing the ECB would attempt if needed.
  • The ECB is doing nothing but talking down the EURUSD (with the exception of cutting the rates to negative territory for the interest on excess reserves), as all other problems seem to be only announced to be applied, and in fact they are not. I am talking about the “whatever it takes” attitude of one and a half year ago, and, of course, the all important OMT (Outright Monetary Transactions) program that exists only on paper. These two alone made the EURUSD jump from the 1.20 area a couple of year ago to the 1.40, again, by ECB doing nothing much at all.

Moving forward, I would say that the path of least resistance for the EURUSD is to the upside and the focus this week is going to be on the economic releases scheduled for this coming end of week trading: inflation (CPI) and GDP (gross domestic product – total value of goods and services an economy is producing).

While everyone is expecting a lower inflation and deflationary threats to appear in Europe, I would be cautious, as not only one, but several ECB members totally discounted deflationary pressures, saying that in Europe that is not going to be the case. And the most powerful voice in this was Germany.

Therefore, I would tend to stay with this view and heading this week trading I would favor a bullish Euro with, most likely, a squeeze to come on Friday with the actual releases regardless of inflation and GDP.

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Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world

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