Eurozone Back From Deflationary Brink

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Eurozone Back From Deflationary Brink
Eurozone Back From Deflationary Brink

Eurozone Back From Deflationary Brink

The Euro is not giving up. The single currency has a new lease of life following last week’s reassurances from the European Central Bank (ECB) that falling inflation is under control. The threat of the Eurozone being plunged into a Japanese style deflationary spiral was weighing heavily on the Euro since late last year.

Markets were initially disappointed by the ECB’s lack of action following last Thursday’s highly anticipated monetary policy meeting. It took Mario Draghi’s subsequent press conference to take things up a gear. His statement that Eurozone inflation would meet the targeted 2% by the end of 2015 lead to every Euro trader in town hitting the buy button. The single currency, which had been frustrated on several prior occasions by resistance just above $1.38, rocketed 100 points ahead to find levels not seen since late 2011.

As every trader knows, strong resistance, if overcome, turns into strong support. This is very much playing out for the Euro. Having spent almost a week above $1.38 it now looks like the Eurozone currency is entering a new phase. That however hasn’t stopped the market from testing the new support line which so far it looks quite solid, technically anyway, EUR/USD is still susceptible to a fundamental shock.

This morning’s Eurostat Industrial Production data provided just that very threat. This figure seldom gets much prominence in the market, today however it was a different story. Industrial Production is highly correlated to inflation, it is therefore a reliable early predictor for the month’s CPI number. Last week the market put a lot of faith in the ECB’s analysis, today was the first opportunity to test that analysis. A solid Industrial Production reading ensured that the ECB passed with flying colors and their decision to withhold monetary easing was duly vindicated.

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EUR/USD had traded very nervously going into this morning’s data release. It remained confined to a tight 15 point range since late yesterday afternoon, evidence that no one was in any form to take on new positions in the single currency, just in case. However today’s early signs of inflationary life lead to Euro bulls breathing a collective sigh of relief, EUR/USD immediately shot higher for another test of $1.39, although it didn’t quite have the momentum to push through on this occasion. This will have to wait for another day.

To contact the reporter of this story: James Brennan at james@forexminute.com