Germany is going to attract the headlines today

“The unexpected news concerning Germany entering deflation for the first time in five years is going to come to a huge surprise to many, but we did witness German economic data deteriorate rapidly during the second half of the year. The main catalyst behind the deflation reading has been the slump in oil prices, though oil markets have continued to fall since December which also means Germany is at risk to even further deflation next month.

Germany is going to attract the headlines today because of this, but what spectators should really begin thinking about is the downside inflation risks the whole of the Eurozone is going to face this year. I currently feel that Eurozone inflation levels are going to remain negative until at least the autumn period, and it will take until then for the lower Euro exchange rate and increased household disposable income for prices to begin to rise again.

As reality sinks in and the markets realise how bleak the Eurozone inflation prospects are for this year, there will be question markets being asked regarding whether the ECB QE program will be enough to combat the problem. The ECB did state the program would be “open-ended” and towards the beginning of the summer period there is the possibility of the markets asking for further QE to be introduced.

Overall though I think the constant deflation woes the Eurozone are going to face this year, alongside the USD continually being supported and likely rising further as the timing approaches for the Federal Reserve to raise US rates will further reaffirm the longer-term bearish outlook for the EURUSD.”