Eurozone Inflation Data Solidifies ECB Easing Expectations

With just one day to go before the European Central Bank holds its highly anticipated policy meeting on Thursday, the euro was steady.

The common currency traded at $1.3608 at 6:00 GMT on Wednesday morning after inflation reports out on Tuesday showed that consumer prices across the region fell even further.

Reuters reported that eurozone inflation dropped to 0.5 percent in May from 0.7 percent in April.

The figure is dangerously close to zero and surprised investors who were expecting inflation to remain steady. The bloc has been struggling with extremely low inflation figures since the beginning of the year, causing some to worry that the eurozone could slip into a period of deflation.

However ECB President Mario Draghi has said the bank doesn’t foresee deflation as an imminent risk, and that the bank has the tools necessary to act if the problem arises.

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The inflation data came just one day after disappointing PMI figures were released and added fuel to speculation that the eurozone’s modest recovery was losing momentum. Most are confident that the bank will ease further on Thursday under the pressure of poor data.

The bank is widely expected to use some combination of an interest rate cut, a deposit rate cut and stimulus spending in order to help weaken the euro and combat falling inflation.

Despite speculation about a policy move the euro has remained steady above $1.36, even gaining 0.2 percent on Tuesday after the poor inflation data was released. Most see an aggressive ECB policy move as already priced in, so traders have placed their bets against the common currency.