The inflation data which came from EU yesterday have underscored the retreating of the prices power and the persisting of the disinflation case in EU, as Oct Germane HICP rose by only 0.7% as expected after rising by 0.8% in September and France Consumer Price Index (EU norm) final of October rose by 0.5% after rising by 0.4% in September and Spain HICP retreated yearly by 0.2% as expected, after falling by 0.3% in September and also Italy Consumer Price Index (EU norm) final of October rose by 0.2% as expected, after retreating by 0.1% in September which are close rates to the preliminary readings suggesting no change of EU CPI of October which came initially wit rising by 0.4%, after it rose yearly by 0.3% in September to record the lowest pace of rising since October 2009, while the ECB yearly inflation target is at 2% y/y which has not been seen since Jan 2013 with existence below 1% since October 2013 suggesting continued need of stimulating the Economy to not watching the disinflation turning to deflation specially as the continued falling of the energy prices can take its toll on this rate later to drive it below the zero line.

As EURUSD which has been trading near 1.40 on last May. 8 reaching 1.3993 has slumped to 1.2357 by the end of last week, while WTI reached until now $74.01 per barrel which has been the lowest reached level since September 2010, After it could reach $107.34 on last Jun. 23

So, it is not only the economic activity slowdown what can drag the EU economy into deflation

God willing, we will be waiting ahead for the release of EU Q3 GDP flash reading by the end f the week and it is not ruled out to watch negative q/q rate, while most expectations refer to growth by 0.1% after no change in the second quarter following growth by 0.2% in a seasonally adjusted way.

It seems that ECB is in need to watch negative GDP Q/Q and negative also CPI as an excuse, before imposing a QE.

We have seen Draghi last week hinting that there can be further easing measures to be taken, if it is needed.

He has said that the ABS is expected to widen the ECB balance sheet to early 2012 levels. He means around €2.7tr from about €2tr currently and he said that processing to last for 2 years including buying assets from low credit rating rescued countries in EU but with adjusting the taken risk in a transparent way for supporting the economy.

Draghi has assured on the geopolitical concerns and the insufficient governmental reforms as downside risks facing the EU economy which can be supported from another side by the confidence in spending by the current lower energy prices, despite the visible weakness in the EU labor market.

The ECB is looking also not satisfied by its TLTRO offers, after the first one disappointed it by ending on only €82.602b request, while the initial estimation by the ECB of the first 2 TLTROs rounds was reaching €400b but it looks that there is still less confidence in the capital spending and that’s why the ECB did not forget to argue the banks to widen its balance sheet too to support the real economy, after it kept everything unchanged with no more stimulating measurements for the second time, after September meeting.

Kind Regards

 

FX Market Strategist

Walid Salah El Din

Mob: +20 12 2465 9143

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