Market News & Insights
29 May 2017

ECB ‘Where Is Inflation?

With both the UK and US markets closed today, the start of the week will see a larger focus than normal on the Eurozone and the ECB’s plans for monetary policy. Later today ECB President Mario Draghi appears at his quarterly hearing before the European Parliament’s Economic and Monetary Affairs Committee. Despite nearly all indicators showing positive signs, the one elusive and most significant one is inflation with questions likely to focus on ‘Where is Inflation?

Despite economic activity as measured by the Purchasing Manager’s Index being at its highest level in six years, economic confidence potentially at its strongest in a decade and the unemployment rate at its lowest since 2009, there is still no sign of sustained and significant inflation. Markets are even forecasting that Eurozone inflation out this Wednesday will show it has fallen to 1.5% from 1.9%. We also have plenty of other data releases this week for the Eurozone ahead of next week’s ECB meeting. Tomorrow starts with Eurozone and German consumer confidence, followed by German CPI. Then as already mentioned, we have key Eurozone inflation figures on Wednesday. The current trend in inflation suggests that the ECB at next week’s meeting is highly unlikely to discuss or even mention tapering of its current QE bond buying program which is currently set to end in December.

As we mentioned at the start, we expect trading volumes to be very low today with the significant UK and US markets closed for Bank Holidays. As a result, the general trends from last week still remain with the likes of sterling still reeling from a week of losses. EURGBP has maintained its gains above the .87 line (GBPEUR 1.1494) with short term resistance likely to be seen at .8735/45. Similarly GBPUSD continues to trade on a weaker footing at 1.2833 albeit off Friday’s 1.2780 lows.