The Euro Zone Consumer Price Index is set to show inflation shrank at an annual pace of -0.2% in August, confirming initial estimates. To that effect, the reading may already be priced into the exchange rate and, barring unforeseen revisions, looks unlikely not produce a meaningful response from the currency markets. The longer-term view is not encouraging for the single currency, however: while the August reading amounts to a slight improvement from the previous month’s -0.7% contraction, the bottom line is that prices are set to decline for the third consecutive month, threatening to bring economic growth to a virtual standstill if expectations of lower prices in the future encourage consumers and businesses to perpetually delay spending and investment. This leaves the door open for traders to punish the Euro in the months ahead if it becomes clear the currency bloc is heading for a long-term period of sub-par performance and low interest rates.
