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Eurozone Inflation takes Centre Stage

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Eurozone Inflation takes Centre Stage

The European Commission will publish official inflation figures Tuesday, setting the stage for a potentially landmark policy statement from the European Central Bank later this week.

German consumer prices fell to a four-year low in May, the European Commission reported today. German inflation, calculated using a method harmonized by the European Union, declined 0.3 percent in May. Economists forecast a slight gain of 0.1 percent.

Year-on-year, inflation edged up 0.6 percent, down from April’s annualized 1.1 percent pace.

Deflation in the Eurozone’s largest economy does not bode well for the broader currency region, which has struggled with dangerously low inflation for the past seven months. Eurozone consumer prices fell below 1 percent in October and have yet to recover. The ECB slashed interest rates to an all-time low of 0.25 percent in November to no avail, forcing policymakers to consider less conventional methods like quantitative easing and a negative deposit rate.

ECB President Mario Draghi acknowledged last week deflation poses a serious threat to the Eurozone recovery, raising expectations the central bank is willing to act this coming Thursday.

Eurozone inflation is forecast to rise 0.7 percent annually in May, unchanged from the previous month’s rate. The so-called core measure, which excludes volatile products such as food and energy, advanced 1 percent annually in April, official data showed.

The EC will also report on Eurozone unemployment Tuesday. The unemployment rate for April is forecast at 11.8 percent, unchanged from the previous month.

On Thursday the EC will report on April retail sales.

Germany will release official data on industrial production, trade and factory orders in the second half of the week.

In currency news, the euro fell sharply against the US dollar Monday, precipitated by weak German inflation and a sharper than forecast drop in Eurozone PMI.

The EURUSD was trading at 1.3594, declining 0.29 percent. The pair lost initial support at 1.3604, leaving 1.3575 as the next target. On the upside, resistance is at 1.3657.

Markit Group’s gauge of Eurozone manufacturing activity fell from 53.4 to 52.2 in May, driven by widespread declines throughout the currency region. Manufacturing output fell to a ten-month low in Austria. France’s manufacturing industry contracted, falling to a four-month low, while Germany’s PMI indicator fell to a seven-month low, Markit data showed.

The EURGBP declined 0.16 percent to 0.8119, as the markets disregarded weak British data. The pair is likely supported at 0.8110. Initial resistance is located at 0.8146.

The Bank of England reported today that mortgage approvals, consumer credit and net lending to individuals all declined more than forecast in April. Meanwhile, Markit Group reported another solid month for the UK manufacturing sector in May.

The BOE’s Monetary Policy Committee will meet June 5 to discuss monetary policy and set the interest rate. No change in policy is expected, as the BOE continues to monitor the UK’s consumer-driven recovery.

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