May the Euro zone lower inflation push the ECB to act on Thursday meeting??

May the Euro zone lower inflation push the ECB to act on Thursday meeting??

ECB last meeting was a Rock’ n Roll to the traders, the single currency surged near $1.40 psychological area as ECB maintained the bank monetary policy unchanged and then dropped sharply near 160 pips after ECB President Mario Draghi dovish comments, who the first time acknowledged a time frame for a potential central bank intervention on June. A low inflation rate may prompt the ECB to act through further monetary easing to counter the risk of deflation.

However, overall situation in euro-zone have not improved since May 8th ECB meting, instead the latest economic indicators are mostly disappointing.  Major weaknesses are registered in France and Germany. Recent economic data on Monday showed that the German manufacturing PMI declined to 52.3 compared the previous reading of 52.9.

Furthermore , today, we witnessed the release of an important key economic data concerning the inflation rates  in the euro-zone which fell unlike expectations  to 0.5% in May from 0.7% in April, and this will add more pressure on the ECB to ease further its monetary stimulus as this data remains too far and below the ECB 2 % inflation target.

We believe, even the EUR/USD prices are hovering the $1.3600 area, the pair remains overvalued due to the divergence in ECB and Fed monetary policies. Both central banks are taking different path; the Fed is heading toward interest rate increase while the ECB is debating rates cut. In fact, improving economic data in U.S. is supporting the possibility that the Fed may raise interest by the first semester of 2015; in contrast in the euro-zone the ECB is considering a rate cut as early as on Thursday June 05 meeting in order to tackle the risks of low inflation.         

We also wait the release of other important data before the ECB decisions including the Service PMI data in Euro zone due on Wednesday, while German factory orders due on Thursday few hours before the interest rates decision and Mario Draghi speech.

So an improvement of the indicators will diminish an imminent ECB action while disappointments should be taken as further monetary action is likely to take place.

MBCFX Forex & CFDs Brokerage Firm