Stocks advanced in the Asian session as markets continued digesting President Trump’s covid diagnosis.
Anaemic inflation could encourage the ECB to take action after Lagarde hinted at AIT.
EUR/USD rates validating bearish reversal pattern. Is there more downside to come?
News that President Trump could be discharged from hospital boosted risk sentiment in the Asian session.
Australia’s ASX 200 rallied +2.5% after the Australian Federal Government’s announced a $7.5 billion package in additional infrastructure spending.
The safe havens US Dollar and Japanese Yen trended lower versus major peers. The risk-sensitive Australian Dollar advanced
Gold dropped targeting $1,890/ as yields on US 10-year Treasuries rebounded above 70 basis points.
Speeches from Federal Reserve officials and ISM non-manufacturing data (Sept) are in focus.
ECB To Act On Disinflationary Pressures?
Eurozone inflation data for September was weak and could encourage the ECB to take further action to support the trading bloc’s economic recovery. Headline inflation is forecast to drop to -0.3% whilst core inflation is expected to reach a record low of 0.2%.
Some weakness in inflation can be attributed to delayed summer sales and lower energy prices. However, a resurgence of Covid-19 infections combined with relatively strong Euro could keep inflation subdued near term
The University of Oxford’s Government Response Stringency Index highlights the impact of a relentless surge of coronavirus infections in France, as the local government begins to tighten restrictions and plans to shut down bars in the capital city of Paris.
ECB President Christine Lagarde’s comments that the ECB could adopt a flexible form of average inflation targeting (AIT) appears to be as a results of the persistently weak inflation in the region., with the ECB President said “the wider discussion today is whether central banks should commit to explicitly make up for inflation misses when they have spent quite some time below their inflation goals”.
Lagarde highlighted the advantages of AIT particularly when the economy ”is faced with the lower bound because the promise of inflation overshooting raises inflation expectations and therefore lowers real interest rates”.
ECB speakers due to speak this week could provide additional further clarity to President Lagarde’s comments. In which case they could drag on Euro demand with the potential of additional stimulus probably dragging on EUR/ USD.