28 Nov 2014
EUR inflation in focus as expectations set to fall further – BTMU
FXStreet (Barcelona) - Derek Halpenny, European Head of Currency Strategy at the Bank of Tokyo Mitsubishi UFJ, notes that inflation is in focus again in Europe as the recent fall in energy prices is seen to be a major drag on the overall inflation.
Key Quotes
"The 5year/5year forward inflation swap rate that ECB President Draghi cited as a measure the ECB monitors fell notably yesterday after OPEC announced an unchanged output ceiling for oil production of 30mn barrels per day.”
"From an inflation perspective, this drop is more relevant for the ECB than other central banks seen as the ECB target rate includes energy prices. Energy makes up a little less than 10% of the euro-zone CPI basket and now Brent crude oil is now down around 35% on an annual basis."
"If this drop is sustained through the remainder of the year, energy inflation is set to become a bigger drag on overall inflation. The annual rate is currently at -2.0% as of October and this could drop to -4.0/4.5% over the coming months."
"Energy alone could take euro-zone annual inflation to zero by the end of the year. The risk now is that the actual annual inflation rate recorded in 2014 comes in at 0.4-0.5%, lower than the current 0.6% forecast from September. That would also leave the 2015 current forecast of 1.1% highly questionable."
"We still do not expect any action from the ECB next week despite the increased downside risks to price stability from the large drop in crude price yesterday but the rhetoric from President Draghi next week at the very least will be very clear of the potential for action in Q1 if circumstances do not change.”
“We still see limited downside from here for EUR/USD given the developments in the energy markets also increase the likelihood that the FOMC rhetoric over the coming weeks could also signal a potential delay in the start of rate increases due to falling inflation expectations.”
Key Quotes
"The 5year/5year forward inflation swap rate that ECB President Draghi cited as a measure the ECB monitors fell notably yesterday after OPEC announced an unchanged output ceiling for oil production of 30mn barrels per day.”
"From an inflation perspective, this drop is more relevant for the ECB than other central banks seen as the ECB target rate includes energy prices. Energy makes up a little less than 10% of the euro-zone CPI basket and now Brent crude oil is now down around 35% on an annual basis."
"If this drop is sustained through the remainder of the year, energy inflation is set to become a bigger drag on overall inflation. The annual rate is currently at -2.0% as of October and this could drop to -4.0/4.5% over the coming months."
"Energy alone could take euro-zone annual inflation to zero by the end of the year. The risk now is that the actual annual inflation rate recorded in 2014 comes in at 0.4-0.5%, lower than the current 0.6% forecast from September. That would also leave the 2015 current forecast of 1.1% highly questionable."
"We still do not expect any action from the ECB next week despite the increased downside risks to price stability from the large drop in crude price yesterday but the rhetoric from President Draghi next week at the very least will be very clear of the potential for action in Q1 if circumstances do not change.”
“We still see limited downside from here for EUR/USD given the developments in the energy markets also increase the likelihood that the FOMC rhetoric over the coming weeks could also signal a potential delay in the start of rate increases due to falling inflation expectations.”