This week has a lot of risk events for the Euro. Two key data points will be released, the Euro CPI figures and Q3 growth estimate. But the national components will come out ahead of the data for the whole of the EuroZone, giving the market a slow drip of information that could cause additional volatility.
After cutting rates at the last meeting, ECB Board members are in an open debate about whether the economy is slowing at a rate that justified accelerating the pace of rate cuts. Markets have moved to price in at least one 50bps cut before the year is out. That has contributed to weakness in the Euro, which could reverse if the data makes the case for a more shallow cutting path. But if the figures show the economy is slowing even faster than expected, the aggressive rate cuts could open the possibility of traders considering the Euro returning to parity with the dollar.
Will Prices Rebound?
Inflation in the shared economy has already popped below the ECB’s target, ahead of schedule. Though that deserves an asterisk, since the ECB’s forecast calls for CPI to fall to around 2.0% and then stabilize, and doesn’t take into account momentary blips below the target followed by a rebound. In fact, ECB President Christine Lagarde said that the expectation is for inflation to pop back above target in the coming months before definitively settling down. If CPI continues to trend below target, it could disrupt the prediction that the ECB will take a measured approach to easing.
Germany gets the ball rolling on Wednesday, with expectations that it will report an inflation rate of 1.8% for its flash October reading, up from 1.6% reported in September. That would support forecasts for Thursday’s forecast of Euro Zone inflation popping back up to 1.9% from 1.7% previously. Although not going above target, that would still fit the trend expected by the hawkish side of the ECB. Meanwhile, the core rate is expected to have its first rebound in months, popping up to 2.8% from 2.7% prior.
It’s the Economy
A slower economy traditionally leads to slower price acceleration as monetary circulation slows. If the European economy continues to essentially stagnate, or worse, it would likely drag down the inflation rate. The ECB does not have a mandate to support the economy. But lack of growth would likely bring back memories of the Draghi era where the ECB struggled to get inflation up to target, due to poor economic performance in the shared economy.
A drop in GDP figures, even if accompanied by inflation meeting expectations, could lead to further weakness in the Euro as investors price in slower inflation in the coming months. Meeting or exceeding expectations of an acceleration in the economy would likely support the hawks’ views that rates need to come down slowly.
What the Data is Expected to Say
Once again, Germany could set the tone with its release on Wednesday, with the largest economy in the EuroZone reporting an hour early. Germany is expected to report another -0.1% quarterly growth rate for Q3, putting it into a technical recession. Just one decimal of difference here could save the country from falling into the red and lead to cheerfulness in the market. Or Germany could cement its status as the “sick man of Europe” if it reports in the negative but the rest of the continent manages to accelerate.
The expectation is that the Euro Area will see accelerating growth in spite of Germany’s situation, with the Q3 Eurozone GDP forecast at 0.3%, up from 0.2%. This would give it an annual growth rate of 1.0%, almost doubling the pace from the prior quarter which was at 0.6%.
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