Inflation Has Stabilized in the Eurozone, But the ECB is Still Pessimistic

The economy of the Eurozone has been in a difficult spot for quite some time, after having slowed down considerably in the last year, especially manufacturing and industrial production. Inflation has also been weakening, falling to around 0.7% at some point last year. But, it has improved in recent months, although the ECB doesn’t seem happy with it. Below are comments from ECB officials who don’t seem happy with it:

Comments by ECB president, Christine Lagarde, at the WEF in Davos

• We are not seeing transmission from wages to inflation yet
• Upward move in inflation is really minor
• Downside risks are less pronounced due to trade deals

Comments by ECB governing council member, Olli Rehn

• Inflation expectations have become stuck at a low level
• This is something that the governing council discusses incessantly
• This is at the core of the strategy review, we want to make sense of it
• One option is to set price stability target closer to that of other central banks
• A flexible and symmetric inflation target may be a good option for the ECB to study

Well, things have at least improved in recent months, as today’s manufacturing and services reports showed. But historically, inflation expectations look to be anchored at really low levels since the drop-off last year, around 1.3%. The fear for the ECB is that it stays this way for too long and a deflation mindset starts to set in eventually. This sort of talk should keep the Euro bearish, so sell the retraces higher in EUR/USD.