GBP/EUR 1.2613 (0.7928)
In the Eurozone we have seen a number of key ECB speakers across the wires the past week. The head of the ECB, Mario Draghi ramped up the seriousness of the situation at the end of last week in Frankfurt where he mentioned the word “inflation” no more than 46 times. With everything bar the kitchen sink being thrown at the recovery of the single currency region the problems still very much remain. This was again evident yesterday when we saw Spanish prices drop 0.4% for the month, matching the fastest rate of deflation since 2009. The single currency also failed to catch a break in Germany, where record-low unemployment failed to stop inflation slowing to the weakest since February 2010.
With the next policy meeting looming and the region remaining close to economic stagnation, many analyst will be looking for Draghi to step up efforts. In yesterday’s speech in Helsinki he reiterated that if current policy measures continued to be ineffective than the Governing Council is “unanimous in its commitment to use other unconventional instruments”.
Up to now the central bank hasn’t appeared to be overly enthusiastic around pursing an outright QE program. However today’s regional inflation figure expected to slow to 0.3%, and well below its medium-term goal of just under 2 percent, any miss here and Draghi and the ECB may just have to let the kitchen sink fly.
In the UK we have a very different type of recovery taking place. While growth has continued to remain decent there are a number of concerns around the make-up of it. On Wednesday we saw GDP growth of 0.7% QoQ which is a relatively attractive reading, particularly when you compare it against Germany’s output figure of 0.1% which was released Tuesday. Analysts however have pointed to potential gaps in this reading, with government spending up 1.1%, while private consumption increased 0.8%, which is perhaps down to lower oil and food prices. Another area of concern was exports which were down -0.4%. This figure very much highlights the effect that the Eurozone is having on the UK’s recovery as its Top 5 trade partners are all located in the single currency bloc.
It will be interesting to see going forward what effect the Eurozone’s continued struggles along with lower oil and food prices will mean for UK inflationary reading. Carney may just yet have to get the pen and paper out in the near future if prices in the UK continue to drop, as a fall below 1% will require an update to the Prime Minster!
Finally in the US where the recovery continues to go from strength to strength, albeit with a few hiccups along the way. With the next Fed meeting due in the middle of next month, many analysts are now calling for an amended in its policy language. Many had expected this to be the case at the last meeting, however the phase “considerable time” was kept with with global concerns a major influence. While no EU countries feature in the US’s top 5 exporting partners, both China and Japan do, where the dollar has continued to strengthen against both on the back of their respective policy easing programs.