Eurozone inflation release and its currency implications
Falling inflation in Europe has become the primary focus in EUR as the market speculates potential ECB QE. As such, Wednesday’s release of flash April harmonised index of consumer prices (HICP) will be widely watched. The UBS Economics team expects April Eurozone HICP to rebound from March’s low reading of +0.5% YoY to +0.9% YoY, high enough for the ECB to shelve any talk of QE or other unconventional easing (see “Eurozone inflation: This should be the bottom,” 4 April 2014, and “Euro Area: deep-dive into deflationary threats,” 2 April 2014 by Reinhard Cluse and Gyorgy Kovacs). Falling Eurozone inflation does not necessarily mean deflation, and as long as the Eurozone recovery remains on track, the bar is high for the ECB to implement QE (prolonged deflation would be necessary). Nevertheless, amongst FX investors, any downside surprises in Wednesday’s release would trigger additional market speculation for QE and as a result, strong reaction in EURUSD and EUR crosses.
Read the full report: UBS