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German inflation falls again – ECB rate cut coming?

Germany reported a drop of 0.2% in consumer prices in October. No change was expected. Year over year, prices rose by only 1.3% instead of 1.4% expected.

EUR/USD has already been under pressure during the week, and will probably remain on the back foot until the rate decision on November 7th. However, it remains on high ground. Adding the high exchange rate of the euro at the moment, will the ECB cut rates or announce a new LTRO program?

The numbers are not only below expectations, but also getting further away from the 2% target of the European Central Bank. The ECB has been blamed in the past for focusing too much on German interests, which are German inflation, while overlooking unemployment and issues in other countries.

In any case, the all-European inflation rate stands at around 1.1%, even lower than the German rate.

The high exchange rate of the euro is not only a result of the US dollar’s weakness, but also a result of inflows into the euro-zone. These inflows make European exports less attractive and make imports less expensive.

With lower inflation, there is also a danger of outright deflation, where the fall of prices discourages buying, which pushes prices lower, etc. This kind of vicious cycle is being fought in Japan and in the US.

Given these figures, there is a higher chance that Mario Draghi will express more concern about both inflation and the exchange rate.

However, will he also push new policy? The main lending rate stands at 0.50% leaving little room for action. The deposit rate stands at 0% and the ECB already said it is technically ready to introduce a negative deposit rate. Nevertheless, a negative deposit rate is seen as a “nuclear weapon”, that might have unintended consequences. This step would send the euro plunging face down, and the ECB is unlikely to go this far.

What’s more likely is that Draghi will warn that the exchange rate is weighing on Europe, and perhaps provide hints of future rate cuts. This will push the euro a bit lower.

So, there is a better chance that the ECB will not make policy changes but just hint of upcoming ones. This will hurt the euro but not sent it down too fast.

Further reading:  Has the Euro slide against the US Dollar started?

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.