Markets Demand Decisive ECB Action

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Markets Demand Decisive ECB Action
Markets Demand Decisive ECB Action

Markets Demand Decisive ECB Action

When is good news a bad thing? Watching the Euros reaction to this morning’s economic data releases you would be forgiven for thinking that stronger than expected growth is in fact bad. Actually in this case it is.

The February PMI services figures for both Germany and the Eurozone as a whole were published just before 9am GMT this morning. They were a clear improvement on the January figures and easily beat all consensus expectations. Yet the Euro nose dived 25 points from the daily high of 1.3742 against the US Dollar.

It would be straightforward to blame rogue consensus estimates for this unusual phenomena, except it re-occurred just over an hour later.

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Eurozone GDP figures came in flat, showing growth to be low but stable, this was exactly what the market expected and as such shouldn’t have contributed too much to currency moves. In fact the GDP figures were accompanied by January’s Retail Sales numbers, these numbers contained strong positive surprises in both the monthly and yearly data. The Euro again sold off sharply, immediately giving up another 25 points to find support below 1.3710, if anything this should have triggered buying of the Euro, particularly as we head into tomorrow’s European Central Bank (ECB) meeting.

And therein lies the problem. Recently, the ECB has been backing away from an anticipated further cut to the offical Eurozone interest rate. The reason being given is that falling inflation has stabalised and the risks of the Eurozone entering a period of deflation have evaporated. The markets don’t agree. True, last week’s CPI figure showed an uptick in inflation, but this is only one data point, there is a real fear in the market that deflation could rapidly take hold as it did in Japan in the 90’s. The similarities between Japans economic condition then and Europe’s now are not lost on the market.

The ECB has the unenviable task of juggling the needs of 28 separate economies when it considers it’s monetary policy stance. This often leads the ECB to shy away from decisive action. Today’s Euro selling reflects the markets fear that the ECB will use signs of growth as a reason to postpone taking the necessary steps to fight the deflation threat. A failure of the ECB to act tomorrow will likely lead to a further Euro selloff.

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