The speed at which prices are falling in Europe is faster than anticipated, bringing the European Central Bank closer to easing monetary policy. It's becoming increasingly realistic that Europe will adopt a more lenient policy earlier than the United States.
Producer prices in the Eurozone fell by 0.9% in January, following declines of 0.5% in the previous month and in November. Analysts had initially forecasted a drop of 0.1%. The fall in prices and the slowdown in China's economic activity should also be seen as factors putting pressure on European prices. Both Europe and the United States are concerned that overproduction will lead to deflationary pressures. Initially, the public might not be too concerned about this phenomenon, as they might appreciate cheaper goods. However, in the long term, deflation could be seen as a sign of economic weakness.
For the foreign exchange market, the weakness in producer prices puts downward pressure on the currency, as it brings the date of policy easing closer, reflecting weak demand.
