Inflation headache for the ECB

Currencies Direct January 10th 2014 - 2 minute read

Low inflation and volatility in money market rates
are becoming the main concern for the European Central Bank. The
left interest rates unchanged at yesterday’s meeting as President
Mario Draghi said they strengthened their forward guidance. Draghi
reiterated that “interest rates will remain at present or lower
levels for an extended period of time,” and warned that the ECB
would “act if the inflation outlook worsened” or “money markets
tightened.” Draghi’s dovish tone triggered a euro sell off as he
spent most of his comments talking about low inflation and warned
that growth risks remain “on the downside”. He also barely
acknowledged the positive news out of Germany as the rest of the
region is still struggling to grow. As better industrial data came
out of Germany, Greece industrial production dropped again which
was an embarrassment for the Greek government especially at the
beginning of their EU presidency earlier this month.

Today in the U.K, industrial and
manufacturing production unexpectedly stagnated in November and
construction fell to its lowest in more than a year, indicating the
economy may have struggled to build momentum in the fourth quarter.
Industrial output, which accounts for about 15 per cent of the
economy, was forecast to have increased 0.4 per cent. From a year
earlier, industrial output rose 2.5 per cent in November with
Manufacturing increasing 2.8 per cent in that period.

Across the pond, reports showed a continuing
improvement in labour conditions with jobless claims reinforcing
the positive outlook for the US economy and labour market. The
labour market ended 2013 on a roll, with businesses continuing a
several-month streak of solid payroll gains by adding 238,000 jobs
in December, payroll processor ADP said on Wednesday. Investors are
now focusing on today’s non-farm payrolls and they are expecting a
strong number.

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