For how much longer can the ECB continue to ignore this chart?

The market gauge of long-term euro area inflation expectations has fallen by more than 7 bps so far this week to fresh record lows


After breaching below its 2016 lows following the ECB meeting last week, market confidence towards the central bank being able to normalise monetary policy has continued to take a nosedive this week. The key gauge of long-term euro area inflation expectations is making fresh record lows again in the European morning today, falling to ~1.16%.

It’s been a developing story for the whole of this week and as mentioned before, the surprising thing here is how the euro has been resilient throughout.

Currency traders are either not buying into the story that the ECB will cave and introduce additional stimulus in fear that inflation expectations will start to become deanchored or they are going to have to do some serious catching up over the next few days/weeks if things continue down this current path.

Put to scale, inflation expectations at ~1.16% doesn’t feel like it’s a big deal but the fact is this is pretty much unprecedented in the euro area and there is no doubt that this is a slippery slope that the ECB does not want to continue down with.

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