EUR: Inflation in focus for Eurozone - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the German inflation on an EU harmonised basis came in weaker than expected yesterday with the annual rate remaining at 0.7% instead of ticking slightly higher to 0.8%.

Key Quotes

“That points to the potential for a weaker euro-zone print when the flash estimate is released this morning. That would no doubt reinforce expectations of the ECB extending QE when it meets on 8th December. Reuters yesterday ran a story reporting that President Draghi stated that the ECB would buy more Italian debt if the referendum result triggered notable selling by investors. Given the ECB highlighted last week in its Financial Stability Report the risk of political uncertainty triggering financial market instability, which would increase downside risks for the economy, we have no doubt the ECB would do just that. The Italian-Bund 10-year spread tightened notably yesterday on the speculation although the widening trend through November remains very clear.”

“We see the ECB as the key potential stabiliser for financial markets over the coming six months in the euro-zone as key political events unfold and in that context we expect the ECB to be very clear in their determination to persist with aggressive monetary easing when it meets on 8th December. That will keep the pronounced divergence in rates as a theme for EUR/USD selling for now.”