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Deflationary risks in the euro bloc looming – Rabobank

FXStreet (Edinburgh) - Jane Foley, Senior Currency Strategist at Rabobank, assessed the last figures from the inflation figures in Euroland and compares them with the Japanese case.

Key Quotes

“Over the past year or so the strong disinflationary trend of the Eurozone has resulted in numerous comparisons over whether the region could be headed towards Japanese style deflation”.

“While the BoJ may currently be able to claim some success in pushing higher inflation expectations, the ECB cannot. ECB President Draghi last week emphasised that there had been a “significant decline at all horizon” in inflation expectations and it was this that drew the pledge to use “all the available instruments needed” to ensure price stability”.

“The BoJ sees a rise in inflation expectations as being pivotal in breaking out of the deflationary loop. On this point, it is clear that the ECB is agreed”.

“Insofar as there is a causal link between CPI inflation and inflation expectations, how low Eurozone CPI inflation falls is likely to have a strong bearing on determining how far the ECB will go in provide fresh policy incentives”.

“A Reuters surveys suggests that economists are of the view that the ECB may have embarked in QE by March next year. Continued weak EZ CPI readings will likely ensure further interim policy announcements”.

“We expect the EUR to remain under pressure, though with further stimulus from the BoJ still possible we would prefer to sell the EUR vs. the USD rather than the JPY”.

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