Euro plunges to nine year low as Eurozone is dragged into deflation

Enrique Díaz-Álvarez08/Jan/2015Currency Updates

GBP

A lack of data in the UK did nothing to halt the Pound’s recent run of declines, with Sterling falling by 0.3% on the Dollar.

A very quiet day in the UK as far as data was concerned on Wednesday. Retail shop prices did, however, fall by an annualised 1.7% in December according to the British Retail Consortium shop price index. The price fall was not quite as sharp as November’s 1.9%; however, with the exception of April, this did mark the twentieth consecutive month of declines in the index. Elsewhere, previously confidential meeting minutes released yesterday revealed the Bank of England were unaware of the impending financial crises as near as one month before it transpired in 2007.

Limited data releases in the UK today, however, the Bank of England will be announcing its latest interest rate decision, with the central bank expected to maintain its record low rate at 0.5%.

EUR

Fresh nine year lows were reached for the Euro which fell by 0.2% against the Dollar yesterday after the Eurozone plunged into deflation.

In a surprise announcement yesterday morning, Eurostat revealed that inflation in the Eurozone turned negative in December, with prices 0.2% lower than in the same month a year previous. Dragged down by the recent slump in oil prices, this marked the first time the Euro-area has experienced deflation since September 2009 and the height of the financial crisis. The Core Consumer Price index, which excludes volatile priced products, unexpectedly rose by 0.8% and demonstrates just how much of an affect the 6.4% decline in energy prices is having on the overall consumer price level. The announcement may well force the ECB’s hand at the next monetary policy meeting, although with the Greek elections looming, full blown quantitative easing this month still remains in the balance.

Unemployment in the Eurozone remained constant for the sixth consecutive month at 11.5% as expected, although the Italian jobless rate rose to a new record high of 13.4%. This was outweighed, however, by better than expected German labour numbers which fell from 6.6% to 6.5%. Elsewhere, retail sales climbed by 1% MoM in Germany in November, although were down 0.8% on an annualised basis.

A slightly more subdued day in the markets today, with most volatility expected at the release of Eurozone retail sales at 10am London time.

USD

The Dollar soared to another fresh high yesterday although stabilised after the FOMC to end the day 0.35% up on its major peers.

Data released in the lead up to the Federal Reserve minutes was largely positive. US private employers added 241,000 jobs in December according to ADP, despite concerns surrounding downsizing at oil-related companies in light of the recent oil price plunge. Mortgage applications rose in the world’s largest economy by 11.1% in the week ending 2nd January, while the trade deficit was reduced in November from $42.25 billion to $39 billion, significantly better than forecast.

The main announcement of the day, however, came from the Federal Reserve, at the release of the monetary policy committee minutes last night. Fed officials deemed any rate increase before April as “unlikely” with the situation in the Eurozone and declining oil prices regarded as an important source of downside risk. The minutes reiterated the central banks need to be “patient” in its interest rate decision, causing the Dollar to dip slightly during New York trading.

Rest of the world

The Swiss National Bank increased its holdings of foreign currency reserves to a record high in order to reinforce its minimum exchange rate of 1.20 per Euro. Oil prices spiked slightly on Wednesday after false rumours surfaced that Saudi Arabia’s King Abdullah had passed away. In other news, the Hungarian Forint edged towards a record low against the Euro while the Brazilian Real rose on growth optimism.

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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.