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Forex: Euro pops higher after inflation

The single currency is up 30 pips after the flash CPI estimate. The headline came in at 0.7% vs. an initial expectation of 0.8%. Note that softer German numbers yesterday had served to push down estimates, so in essence this should have been expected. The reaction of the currency reflects the degree to which markets are focusing on deflationary risks at this point in time, with short-covering helping push EURUSD back above the 1.38 level.  We’re also seeing overnight rates remain on the high side, even after the injection of liquidity from the ECB this week and this is also serving to offer underlying short-term support for the euro. In terms of ECB policy, a policy response is not assured at the May meeting.  Even though the ECB has moved to more openly discuss alternative policy options available to them, it’s not clear that we are at the point where they are going to be delivered.  It’s also not clear that further easing, in whatever form, would be substantially negative for the euro. As ECB’s Noyer acknowledged yesterday, capital flows are causing the stronger euro, not deflation and there is a fair degree of truth in that statement.

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