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Oil and Deflation

Oil and Deflation

Good morning and the markets are starting to get very interesting again.

Focus remains on the all-encompassing oil price as the fall continues to affect everything else in the market. When people think it can go no lower, it continues to drop and it looks like $40 per barrel is the next level, especially after Saudi Arabia said that there were no current plans to curb output. With everyone losing money on oil, it’s surely a case of OPEC stepping in to sort this out sooner rather than later.

The oil price affects much of the data that is released by economies. Today we see an exceptionally important inflation figure released from the Eurozone. On the one hand, things don’t look too rosy as we are expected to see the Eurozone situated in a period of deflation for the first time since 2009. On the other, this would show that the ECB has no other option but to embark on a period of quantitative easing and this could happen as early as next week.

The inflationary figure is brought down by low oil prices, although for the Eurozone domestic prices are falling anyway. In the UK, things are not as drastic, but the fall in oil prices has not yet been fed through to the consumer and the inflation figure is expected to be dragged down by up to 0.5% on the back of oil.

The other impact is that the low price panics the market, moving traders away from riskier currencies and putting their money into the trusted safe havens: namely US Dollar and Gold.

Major events today are unemployment data from Germany, CPI from the Eurozone, mortgage applications from the US and minutes from the Fed’s last meeting once we have gone home.

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