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Posted February 3rd, 2014 by Charles Purdy

Eurozone worries about low inflation, will the ECB cut interest rates?

The euro continued its slide on Friday last week, albeit at a slightly reduced pace. Eurozone consumer price index figures put inflation at a slightly lower rate than expected, contributing to the continued weakening. Inflation indicators are likely to continue to have a strong bearing on the performance of the eighteen-nation currency as the European Central Bank (ECB) remains open to implementing further measures to prevent inflation falling further. It is also worth noting the outcome of the German monthly retail sales data release on Friday morning, which revealed a drop of 2.5% in the value of sales for the final month of 2013. It is likely that these figures also contributed to euro weakness as expectations were of a marginal increase.

During the week we have the release for the Eurozone and individual countries of their Purchasing Managers Indices (PMI) for Manufacturing, Construction and Services. These will be closely scrutinized as this Thursday provides the greatest potential for volatility as the European Central Bank (ECB) will decide whether to alter the current Minimum Bid Rate, which is currently at a record low of 0.25%. There have been rumours of further reductions, which have been encouraged by the worse-than-expected consumer price index figures on Friday, and we can expect these rumours to increase if the PMI figures are worse than expected . Such a move by the ECB would certainly cause significant euro weakness..

In terms of data releases, further influence may be derived from Spanish unemployment figures on Tuesday and German trade balance figures on Friday.

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