Eurozone inflation dipped below zero again in September, dragging inflation expectations lower.
All eyes will be on Draghi and his colleagues this week as investors try to gauge whether the latest batch of disappointing data has increased the likelihood of QE extension. Any signals to that effect could encourage renewed EUR weakness given the impact that QE1 had on the currency.
One way to gauge the impact is to look at the FX price action when QE-related EUR-outflows were the heaviest. A look at the Eurozone BoP data suggests that the outflows intensified significantly between July and December 2014, ahead of the QE announcement in Jan 2015. EUR/USD dropped by c.15bf over that period.
While the impact of any QE extension (expected in Q116) should be more muted given that global bond yields are now lower, implying less scope for EUR-funded carry trades, the prospects for more QE will keep the risks for EUR on the downside.
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