A return to lowflation in the euro area? – Commerzbank

The euro area wage data for the second quarter, published by Eurostat on Friday, has attracted little market interest in the past. Nevertheless, the news item about the data received some attention on Friday, when a news agency prominently reported it, Commerzbank’s Head of FX and Commodity Research Ulrich Leuchtmann notes.

EUR is unlikely to quickly move towards 1.14

“Inflation expectations for the euro area, especially medium-term expectations (e.g. 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's message is clear: it is not expecting a relapse into inflationary times such as those of the 1990s, but rather a return to the lowflation of the 2010s. We expect persistent inflationary pressure. But, if the deflation of consumer durables imported from China was the reason for the lowflation of the 2010s, then a return to that state of affairs is very likely in the foreseeable future.”

“Whether the market or Commerzbank economists are right will only 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 with regard to the Fed, but also with regard to the ECB. The weakness of the USD that may be induced by the Fed's view should therefore have only a muted impact on EUR/USD. It is hence rather unlikely that the pair will quickly move towards 1.14 (our medium-term target for EUR/USD).”