All Trade Ideas and trading scenarios found on FX360.com are hypothetical. FX360.com has not placed these Ideas in a live trading environment. Forex Trading involves high risks, with the potential for substantial losses that exceed your initial deposit and is not suitable for all persons. Past performance is not necessarily indicative of futures results.

Deflation - What Does it Mean for the EUR/USD?

Last updated 4/21/2009 2:51 AM ET (GMT -5) 0 Comments - Add your comment

• Share this:

Boris Schlossberg

Director of Currency Research, GFT

German Producer Prices in March declined by -0.7% versus -0.3% projected, contracting for the sixth straight month n a row.  Analysts are beginning to worry about the prospect of deflation spreading throughout the Eurozone as highlighted by yesterday’s article in New York Times - and today’s German PPI data does little to alleviate those concerns.

Yesterday, NY Times pointed out that Spain, Luxembourg, Portugal and Ireland are all experiencing downward price pressures. However, it is Germany,  as  Eurozone’s largest economy,  that is most troubling to policymakers.   If Germany, much like Japan in the 1990’s slips into a deflationary spiral any attempts at stimulating the economy will become far less effective. In a deflationary environment consumers  are reluctant to spend,  believing that costs of goods and services will decrease in the foreseeable future. This behavior leads to a vicious cycle of contraction as businesses and consumers continually defer spending  despite government’ s best efforts to jumpstart the economy.

The current worries in the Eurozone center around the fact that ECB has been slow to counteract these forces, continuing to focus  on controlling inflation rather combating deflation. With the region mired in its worst recession since World War II and unemployment rolls increasing at an ever faster pace, the threat of deflation is becoming more serious each day.  For the time being the EZ CPI data remains positive but very mild rising only 0.6% on a year over year basis. However, the dramatic declines on the wholesale level are likely to filter down to retail given the very weak state of consumer demand.

If deflation were to grip the Eurozone, ECB may have no choice but to lower rates below the 1% barrier and may even have to move to a Zero Interest Rate Policy if deflation takes hold. As a result of these problems EUR/USD has been hammered in the currency market for the past week and after a brief covering rally in Asia once again slid towards the 1.2900 handle in early European trade in the aftermath of the release.  If the upcoming ZEW survey at 9:00 AM GMT is unable to offer any positive surprises, the pair could slip into the 1.2800s as the  day progresses.  

The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Forex Trading and FX360 .com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

The views of the authors and analysts are not necessarily those of Global Forex Trading, its owners, officers, agents or other employees. FX360.com and the currency research team will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on FX360.com. Global Forex Trading and the currency research team do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

Loading...

About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.