European inflation declines driving EUR lower
ECB has three options for QE
Germany to have say on final fate of QE
Falling oil prices, political uncertainty in Greece reigniting the austerity debate and low inflation keep driving the EUR/USD to multi year lows. The release of Non-farm payrolls (NFP) report in the United States failed to fuel the USD rally. While the number of new jobs beat expectations and the overall unemployment rate went down, the U.S. Federal Reserve has already said it won’t base its rate setting decision on those numbers. Instead it’s looking at overall recovery and wage growth are in focus. It is precisely wages that disappointed as they contracted in December and helped the EUR/USD remain above $1.18.
Consumer prices fell into negative territory in the Eurozone in December. The decline in energy prices drove CPI to 0.2% lower reading. The expectation was for a lower drop but deflation was already priced it as there have been multiple indicators signalling this outcome. The lack of consensus in Europe regarding the next step in monetary action has the ECB with plenty of ideas, but no real options to try to fight off deflation via a stimulus program.
The German Chancellor Angela Merkel and the head of the Central Bank Jens Weidmann both stated this week that they would not go along with a quantitative easing program that includes sovereign debt. This has some analysts speculating that there can be 3 options available to the ECB:
ECB to buy sovereign bonds pro rated to the member’s nation share of the central bank.
ECB to buy only AAA rated government bonds.
National central banks to be the ones buying AAA government bonds.
Germany stands in the way of most of the options as they are unlikely to agree to buying risky debt, even if only as pro rated by membership into the EU. Germany enjoys AAA status, but it has made clear that it won’t enter into an expansionary policy leaving out option three as Germany won’t buy its own bonds. There could be little objection to the ECB buying German bonds, but the desired outcome is lessened as it could not have a trickle down effect to other member economies.
Next week in Europe
Last week forex market agenda was full of big releases. Next week will not be as action packed. The European Court decision has the potential to move the market the most if there is an unexpected outcome to the ruling on the legality of European Stability Mechanism (ESM). In Asia the Chinese new loans will be reported. Analysts have begun to anticipate a Chinese Credit Crunch. Australia will report its employment statistics which after last month’s surprise to the upside in the number of jobs, but a warning in the low number of hours worked. Analyst will be waiting to dig into the official data for further proof of the Australian employment recovery.
The market will be eagerly awaiting the next European Central Bank meeting scheduled for January 22 with little data releases before then to guide it. The pressure keeps piling on Mario Draghi to launch a quantitative easing program, but the Germans are likely to make the program lower in impact if they get their way to not include sovereign debt with a low rating.
For more market moving events visit the MarketPulse Economic Calendar
WEEK AHEAD
* CNY New Yuan Loans
* EUR European Court of Justice Ruling
* AUD Unemployment
* GBP Consumer Price Index
* USD Advance Retail Sales
* USD Consumer Price Index
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