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Eurozone Data this Week Could Impact ECB Policy

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Eurozone Data this Week Could Impact ECB Policy

Key Eurozone data this week may dictate the European Central Bank’s next move, as policymakers continue to deliberate about the best approach to tackling deflation.

The ECB announced last week it would maintain its wait-and-see approach to monetary policy, stressing the importance of economic data in the central bank’s deliberations. The central bank decided last week to keep the interest rate at 0.25 percent, but said it was prepared to act as soon as June.

The ECB is “dissatisfied about the projected path of inflation,” ECB President Mario Draghi said last week in a news conference following the ECB rate announcement. “The governing council is comfortable with acting next time but before we want to see the staff projections that will come out in early June,” Draghi added.

The ECB reduced the interest rate to 0.25 percent in November after consumer price inflation fell to 0.7 percent in October. The ECB targets inflation at just below 2 percent.

Eurozone inflation has trended below 1 percent for six consecutive months, fueling speculation the ECB may be forced to pursue unconventional policy to curb deflationary pressures. Policymakers are reportedly considering Federal Reserve-style quantitative easing and a negative deposit rate to help spur the Eurozone economy and ensure it does not succumb to deflation.

The European Commission will release its final estimate of April CPI on Thursday. The reading is likely to show inflation remained in what ECB President Mario Draghi described as the “danger zone” of below 1 percent for the seventh consecutive month. The initial estimate showed CPI ticked up slightly to 0.7 percent in April, after falling to a fresh four-year low of 0.5 percent the prior month.

The EC will also report on first quarter gross domestic product on Thursday. The Eurozone economy is forecast to have expanded 0.4 percent quarter-on-quarter and at an annualized rate of 1.1 percent. GDP data are expected to show stark divergences among individual member states, with Germany remaining the main engine of growth.

The German economy is forecast to have grown 0.7 percent in the first three months of 2014. France and Italy, on the other hand, likely experienced little or no growth. Greece’s economy likely contracted 1.5 percent annually in the first quarter, according to forecasts.

Expectations the ECB may soon take action to curb deflation resulted in a sharp decline for the euro. The EURUSD declined more than 1.2 percent at the end of last week. The EURUSD was treading water at 1.3755 on Monday. The pair’s first resistance comes at 1.3802. Initial support is found at 1.3702.

The EURGBP extended its losses Monday, declining 0.13 percent to 0.8155. The pair faces initial resistance at 0.8174. Support is found at 0.8149.

Euro pairs could face more action ahead of Wednesday’s CPI and GDP reports. The Centre for European and Economic Research (ZEW) will report on institutional investor sentiment on Tuesday. German investor confidence likely dropped for a fifth consecutive month, as the ongoing crisis in the Ukraine continues to dampen the regional outlook.

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