The Euro strengthened against the US dollar but the rally has been marginal. Unsurprisingly, inflation last month was hot with import prices rising 1.5 percent in Germany. Despite the recent deterioration in Eurozone economic data, European Central Bank officials have been revving up their degree of hawkishness which leads many people to wonder whether the ECB is digging themselves into a hole.
ECB member Liebscher said this morning that the central bank has room to raise interest rates and that it is absolutely necessary to prevent any possibilities of so-called second-round effects. Unlike the Federal Reserve who needs to worry about growth as much as inflation, targeting inflation is the ECB’s primary focus. In order to get their attention, we may need to start seeing negative quarterly GDP growth. The central bank only worries about growth when it has fallen below potential. Recent economic data clearly indicates that the region is slowing and if oil prices remain at $125 a barrel, the ECB’s concerns about inflation will start to ease, allowing them to become more sensitive to growth. In the week ahead, retail PMI and German unemployment are the big Eurozone releases. We expect this data to continue to be Euro bearish. Meanwhile Switzerland will be releasing the UBS Consumption Index and the KoF report of leading indicators.