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Euro deflation supports expectations of aggressive easing next week

Euro deflation supports expectations of aggressive easing next week

The Eurozone Consumer Price Index (CPI) figures were released yesterday and although the market had expected these to fall from the previous month, the outcome was much softer than expected. The headline inflation figure came out at -0.2% vs an expectation of 0.1%. Perhaps more alarmingly the core CPI figure, which doesn’t take into account the negative contribution of energy prices, fell by 0.3% to 0.7%. The weak figures will pile more pressure on the European Central Bank (ECB) and raises the chance of the bank announcing further stimulus measures this month.

The single currency weakened against the Pound off the back of the poor data, with GBPEUR opening at 1.2693, hitting 1.2835 before losing momentum and falling back down to hover around 1.2800. The Euro had opened at 1.0922 against the Dollar, and off the back of some Euro buying in the morning session, the pair hit 1.09625 before the weak data fueled a Euro sell off and the pair fell 0.8% from the daily high to open today at 1.08728.

As Brexit takes a back seat, February’s UK Manufacturing PMI survey headlines the economic calendar today with a potential recovery on the cards for Sterling. The data is expected to show that the pace of expansion in the manufacturing sector slowed further in February to 52.2, which is slightly lower than the January reading of 52.9. However, there is the potential for an underestimation of the UK economy, which has been present in recent estimations. A positive surprise could be seen because of this, and the markets are likely to react quickly bringing Cable back above 1.4000. On the other hand, a weaker than expected PMI number could play spoil sport and mark the end of the correction in the pair.

Economic data released from the States was weaker than expected yesterday with US PMI and US home sales printing lower for February. Institute for Supply Management (ISM) manufacturing data due today will be closely watched to give market participants indications of industrial trends – vital in terms of the US economy and the Greenback. The Dollar finished stronger yesterday against Sterling after an upward revision of the predicted US GDP for the fourth quarter.

In China, the People’s Bank of China cut the Required Reserve Ratio, the amount of cash banks need to hold, by 0.5 percent. They aim to increase liquidity (replacing money lost in previous capital outflows), with the final goal being a boost in consumer spending and capital investment. China’s economy is slowing, with growth easing to a 25-year low of 6.9 percent in 2015 as they open capital markets and shift away from their manufacturing roots. A moderation of new orders and production led to NBS manufacturing PMI printing at 49, below the expected 49.4, nullifying the bullish effect of a rate cut.

Data to watch: 8.55am German Unemployment Rate & Change (Feb). 9am Eur Markit Manufacturing PMI (Feb). 9.30am UK Markit Manufacturing PMI (Feb). 10am Eur Unemployment Rate (Jan). 2.45pm US Markit Manufacturing PMI (Feb). 3pm US ISM Manufacturing PMI & Prices Paid (Feb) & Construction Spending (MoM Jan).

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