EURO LOW
Euro zone consumer price inflation dropped in January, bucking market expectations and putting the euro in the firing line.
Having threatened to do so all morning, it broke to a two-month low against the dollar of $1.3507 as U.S. trading gathered pace, having started the week at $1.37.
Eurostat’s first reading of January inflation showed it slowed back down to 0.7 percent, the level that saw the ECB, which meets next Thursday, catch markets off guard with a rate cut in November. Unemployment remained at a record high.
“It’s now more likely than ever that Draghi is going to have to step in with some extraordinary measure to stave off deflation,” said Aberdeen Asset Management fixed income investment analyst Luke Bartholomew.
“The big challenge is exactly what to do. With the store cupboard of conventional measures largely bare, any policy action is likely to be unprecedented.”
Although it is more likely to wait until March when it has new in-house forecasts available, the most obvious option available to European Central Bank President Mario Draghi and his fellow policymakers is to take rates even closer to zero, and in the case of the deposit rate that acts as floor for money rates, into negative territory.
But they could just as easily increase the amount of cash sloshing around the system by no longer “sterlising” the 170 billion euros of Italian, Spanish and other bonds bought at the peak of the euro crisis.