Eurozone: Inflation heading up but to stay below 2% - SocGen

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 17, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Research Team at Societe Generale, suggests that on the back of base effects from oil prices in euro terms and assuming a recovery of Brent in euro terms, inflation should recover to average 0.6% in 2016.

    Key Quotes

    “In the medium term, inflation is likely to continue to recover and average 1.5% between 2017 and 2020. The expected recovery in both headline and core inflation assumes:

    A recovery in global oil prices: Our commodity analysts foresee a gradual increase to $50/b by end 2016 and a flat profile at $55/b in 2017, leaving the annual average at €42.1/b (down from €51.7) in 2016 and €53/b (down from €60.3) in 2017. According to our commodity analysts, Brent prices should recover as inventories are likely to start decelerating in Q2 2016. Over the medium term, to fulfill the projected demand growth of 1.1 Mb/d each year, SG analysts believe that the high-cost deepwater offshore and Canadian oil sands will be necessary. Hence, a more meaningful price increase in Brent is anticipated in the medium term. Prices need to increase to $70-80/b at the 2020 horizon to incentivize these projects.

    A U curve for the EUR/USD: Ongoing decoupling in the US and euro area monetary policies will lead to weakening in the EUR/USD, and we expect to see the pair reach parity in 2016. Beyond 2017, the expected slowdown in the US would force the Fed to start cutting its key rates. That phase of monetary easing in the US would help the EUR/USD appreciate.

    Slow recovery in core inflation: We expect core inflation to recover in the medium term but at a gradual pace on account of the expected slow closure of the output gap (estimated at -1.5pp of GDP in 2015). In particular, rising labour productivity and muted wage growth will lead to weak unit labour costs, which are a key driver of services inflation. Note that a weaker euro would not only be positive for the headline but would also benefit non-energy industrial goods prices through higher imported prices.”
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