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.