Once again European Union fears over disinflation have raised their heads. The warning signs had been there earlier in the week, when we once again saw disappointing retail sales figures which strongly hinted that the improvement had quickly disappeared.
European Central Bank president Mario Draghi has decided not to take any action this month, but with EU inflation standing at 0.7% and no real sign that it is about to increase, this raises the chances of change next month. Although cutting the base rate from 0.25% will have little direct effect, it will have a sizable psychological one, so the ECB will need to look into plans B and C.
Conversations around London about the EU embarking on its own quantitative easing process have been given a little more credibility. One reason it was unable to take place back in 2010 was due to Bundesbank’s heavy opposition to it. Now that inflation is so low, the primary reason for its reluctance is no longer in place.
When Mario Draghi has previously spoken, he has been very evasive as to what actions the ECB would be willing to sanction. It now feels like he is increasingly being backed into a corner where he will need to further elaborate on the ECB’s plans.
With all this frothiness, we would be looking for either a close above the 1.3540 top signal for EUR/USD in order to go long, or a close below 1.3475 to go short.