Author: Gordon Platt


Inflation in the eurozone slipped to 0.5% at an annual rate in March, its lowest level since 2009. The persistence of low inflation prompted policymakers to discuss quantitative easing (QE) and a negative deposit rate, putting some downward pressure on the euro.

European Central Bank president Mario Draghi stepped up his verbal intervention at his monthly press conference in April, in what some market participants interpreted as an attempt to discourage investors from driving up the value of the euro, says Nawaz Ali, UK market analyst at Western Union Business Solutions. The single currency fell to a five-week low against the dollar after Draghi said the ECB was designing its own version of QE. Although Draghi didn’t say what that version would be, he said unemployment is now the ECB’s biggest fear, and that the central bank stands ready to act if needed. The ECB made no changes to interest rates and played down the threat of deflation.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, says: “In the face of low and falling inflation and weakening financial conditions, despite the end of the economic contraction, the ECB stands pat and only offers a reiteration of its threat of some unspecified action if needed. However, Draghi did tweak his remarks a little, committing to swift action, if needed, and saying that there was unanimous agreement about the unconventional policies the central bank could use.”


Draghi also repeated his recent comments indicating that the euro’s exchange rate is an increasingly important factor in the ECB’s decisions, Chandler says. Draghi made it clear that QE is a policy option for the ECB, but he didn’t specify whether this would be in the form of bond purchases or negative interest rates on deposits at the central bank.

The 0.5% increase in consumer price inflation, year over year, in March was a little more than a third of what the ECB had anticipated six months ago, Chandler says. “Draghi’s seeming denial of the risk of deflation, with the same fervor that he did when inflation was three times as high, stretches credibility,” he says. “It is the deflation threat that has been the focus of most market observers.”

Meanwhile, the recent string of US economic data, especially for March, has suggested a better finish to the first quarter after a poor start, Chandler says. The US employment report for March was stronger than it appears, he adds. Although the headline job creation was in line with expectations at 192,000, the February job creation was revised higher by 22,000 to 197,000. And while the unemployment rate was steady at 6.7%, the Federal Open Market Committee dropped its 6.5% unemployment threshold, guiding investors to look at broader measures of the labor market.


Chandler notes that the job market participation rate rose to a six-month high of 63.2%. Fed chief Janet Yellen recently cited the low participation rate as evidence of weakness in the labor market. However, despite the jump in the participation rate, March hourly earnings were flat, missing consensus expectations of a 0.2% increase.

Every industry, except manufacturing, added jobs in March. If US data continue to indicate a post-winter bounce, dollar strength could finally materialize, according to analysts at Deutsche Bank. They noted that 10-year Treasury yields have been little changed since the beginning of the year, and that the lack of volatility at the long end of the yield curve will allow the Fed to be more proactive in signaling an accelerated rate-hike cycle.