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Analysis & Opinion | MacroScope Euro falling but no impact on inflation yet

December 17, 2014

Euro zone inflation figures are due and after Germany’s rate held steady at 0.8 percent the figure for the currency bloc as a whole could marginally exceed forecasts and hold at 0.4 percent.

One upside for the currency bloc is the falling euro which has broken below its 2013 lows and is down almost nine percent from the peak it hit against the dollar in May. With U.S. money printing about to end next month and speculation intensifying about the timing of a first interest rate rise from Washington, there are good reasons to think that this trend could continue.

If it does, it would push the prices of imports up while making it easier for euro zone countries to sell abroad which should have an upward impact on both growth and inflation. The impact won’t be instant, however, as today’s figures will demonstrate.

Either way, there is no chance of the European Central Bank doing anything new at its monthly meeting on Thursday having pushed through a range of new measures last time.

We’ve had an early flurry of data. German retail sales jumped 2.5 percent in August, more than reversing a 1.1 percent fall in July.

Britain’s GfK consumer confidence index showed consumer morale edged down from a recent nine-year high as households became slightly less upbeat about the outlook for the economy. The Nationwide housing survey reported a 0.2 percent monthly fall in house prices – the first fall in more than a year – though that still leaves them up 9.4 percent year-on-year. Final GDP figures for the second quarter, due later, should confirm a quarterly growth rate of 0.8 percent, way above anything the euro zone could hope for.

European Union ambassadors will meet to decide whether the Ukraine ceasefire justifies an easing of sanctions against Russia. Moscow is lobby for that, calling for a “reset 2.0″ in relations with Washington and saying the situation in Ukraine that led to Western sanctions was improving thanks to Kremlin peace initiatives.
But the killing of seven Ukrainian soldiers when a separatist shell hit their armoured personnel carrier near the main airport at Donetsk in eastern Ukraine demonstrates why it is too early for the EU to back off. It was the largest loss of life among Ukrainian soldiers in a single incident since a ceasefire came into force on Sept. 5.

A Russian newspaper reported on Monday that U.S. oil giant ExxonMobil is suspending cooperation with Russia’s state-owned company Rosneft on offshore drilling in the Arctic due to sanctions. German Chancellor Angela Merkel said there were good reasons to continue the European Union’s energy partnership with Russia for now but that might change if Moscow continues to violate basic principles.

U.S. warplanes attacked Islamic State targets in Syria overnight in raids that a group monitoring the war said killed civilians as well as jihadist fighters. The U.S. military said on Monday an American air strike targeted IS vehicles near to a grain storage facility, but it had no evidence so far of civilian casualties.

A phalanx of new European Commissioners will be subject to confirmation hearings in the European Parliament over the course of this week and next. The parliament will probably want to claim at least one scalp on the list in a demonstration of its influence. Nominees from Britain, France, Spain and Hungary may face particularly stiff interrogation. Six hearings on Tuesday feature the Greek nominee to handle migration and home affairs and the Austrian nominated to run relations with neighbouring regions and states wanting to join the EU.

One of the highlights will be the appearance on Thursday of Pierre Moscovici, picked as the next economic and financial commissioner. Some have said putting the former French finance minister in charge of issues like budgetary discipline is like putting a fox in charge of the hen coop given Paris’s repeated inability to get its deficit down to the EU limit. Moscovici will probably get the nod, not least because his role will be overseen by the fiscally hawkish Valdis Dombrovskis from Latvia.

Romania’s central bank holds a rate-setting meeting at which it is expected to further cut its benchmark interest rate to a record low of 3.0 percent to aid a slowing economy.



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