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Forex: Deflation is the new disinflation

We mentioned yesterday how sterling and the euro remain the whipping boys of the FX markets and little has changed in the space of 24 hours. Eurozone inflation showing that the single currency’s economic block has dipped into negative territory put a swift end to a meagre attempt by EURUSD to rebound. As talk of deflation does the rounds more now than it did previously concern is now building that this could dent consumer sentiment and entrench the Eurozone into a wider deflationary environment. With the large declines in crude prices being the main culprit for falling inflation it is far too early to be talking of such a situation where consumers and businesses start to worry and put off investment or purchases.

The weakness in EURUSD also comes against a dollar that continues to go from strength to strength. Last night’s FOMC minutes for all intense and purposes were seen as relatively hawkish with encouraging comments on growth, but 2 and 10 year US Treasury yields were largely unchanged. The dollar index remains just below its recent highs, looking ready to take another leg high if the data releases accommodate.

Today we will be keeping an eye out for retail sales from the Eurozone and then the BOE announces its first rate decision of the year. Also worth monitoring the weekly jobless numbers from the US expected to come in at 290k compared to last week’s 298k.

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