A return to low inflation in the Eurozone? – Commerzbank

Second-quarter euro zone wage data, published by Eurostat on Friday, has drawn little market interest in the past. However, news of the data received some attention on Friday when a news agency prominently reported it, notes Ulrich Leuchtmann, head of FX and Commodity Research at Commerzbank.

EUR is unlikely to move quickly towards 1.14

“Inflation expectations for the euro area, especially medium-term expectations (eg 1Yx1Y in the figure above), are falling very, very sharply. They are clearly visible and well below the ECB’s 2% inflation target. The market message is clear: they do not expect a return to inflationary times like those of the 1990s, but rather a return to the low inflation of the 2010s. We expect persistent inflationary pressure. But if the deflation of durable goods imported from China was the reason for the low inflation of the 2010s, then a return to this state of affairs is very likely in the near future.”

“Whether the market or the Commerzbank economists are right will become clear much later. Until then, it is plausible that the market view will hold. And that, in turn, means that the market is likely to assume a significantly looser monetary policy not only from the Fed, but also from the ECB. USD weakness that may be induced by Fed opinion should therefore have little impact on EUR/USD. Therefore, the pair is unlikely to move quickly towards 1.14 (our medium-term target for EUR/USD).”