"Given that inflation is well below target in the euro zone, deflation does, indeed, look to be a bigger risk in 2014 than inflation. Yet painful deflation is unlikely because of "a broad pick-up of growth this year."
- Nick Kounis, head of macro research at ABN Amro Bank NV
The shared currency has lost some ground versus its major peers on Tuesday following a report from the Eurostat, showing inflationary pressure retreated further away from the ECB official target in December, raising concerns the region is still struggling to grow. The report attracted considerable attention of market participants, since Mario Draghi surprised everyone by cutting interest rates in November due to an excessive fall in inflation.
Tuesday's report showed the annual inflation rate dipped to 0.8% in December, easing back from 0.9% a month earlier. The rate has been fluctuating below the central bank's target for 11 months, and has even hit a four-year low of 0.7% in October. The core rate also plunged to 0.7% over the same period, from a 0.9% reading a month earlier. At the same time, data showed producer prices declined 0.1% in November, after a 0.2% gain a month earlier. Analysts, however, expected a reading of 0.1%. December's gauge in couple with weak lending in the Eurozone could be interpreted as an alarming sign for the ECB, and heating up debates whether Draghi will have to pull the trigger on Thursday. In case inflation continue falling down, the likelihood of another intervention and the announcement of negative interest rates seem to be more pronounced than couple of months ago. Despite some strength of the most traded currency pair this week, the pair is likely to find resistance around 1.3652.
© Dukascopy Bank SA