Eurozone on the brink of deflation

The pound found itself under pressure yesterday as it lost ground against both its major counterparts. Wednesday’s gains against both the Greenback and euro were reversed with the rate versus the dollar falling from above the 1.58 interbank handle to 1.5723(IB) by the close of play. Similarly against the euro bloc – Sterling was down 0.14% and trading very close to the downside support of 1.26. There were no major economic releases out of the UK to lend a helping hand yesterday, and with no higher tier data released today it will be interesting to see if the pound continues to struggle. The only data release is Nationwide Housing Prices; considering that the majority of data linked to housing has been weak recently, this could also hinder the pound.

Yesterday’s economic calendar was largely dominated by releases from Europe which made up for the UK's shortfall and the market being closed Stateside for Thanksgiving. We had German unemployment change and unemployment rate figures released first thing; both showing positive readings. The Federal Statistical Office reviewed October’s unemployment numbers from 6.7% to 6.6%, November’s figure was also 6.6%. Inflation in Germany, Europe’s biggest economy, slowed to its lowest level in nearly five years in November. Some market participants believe this has put more pressure on the European Central Bank to take more action to ward off deflation. Should this trend stay the course, it could trigger further widespread panic across the bloc - particularly as Germany itself appears to be barely treading water economically. In a preliminary flash estimate, the federal statistics office, Destatis, calculated that German inflation stood at just 0.6% year-on-year this month, down from 0.8% in October. The last time inflation in Germany was lower than 0.6% was back in February of 2010. German Harmonised Index of Consumer prices year-on-year data was released with a reading of 0.5% down from the consensus of 0.6% and lower than the reading this time last year of 0.7%. These figures are seen as a measure of prices used by Governing Council of EU to assess price stability in the euro area as a whole. The low level on inflation across the Bloc has raised concerns that the region could slip into deflation which could see a drop in the cost of goods across the board. That would more than likely hinder economic activity and heighten the threat of higher unemployment. Such concerns persuaded the ECB to cut interest rates to a new all-time low and roll out other anti-deflation measures such as a series of asset purchase programmes to inject cash into the economy. All eyes will be on today's consumer price index figures from the eurozone as a whole with the last reading of 0.7%, a negative reading will cause the euro to weaken further and shows just how close the 18 nation zone is to deflation.

Thanksgiving was celebrated Stateside with a national bank holiday; there were no economic releases yesterday or today. The next key economic release will be Monday when the ISM manufacturing readings are revealed.