Euro’s sensitivity to German inflation data shows expectation build up for further easing

Euro's move down over German CPI data shows that expectations for further easing by European Central Bank is clearly building up, which might dominate Euro over the coming weeks and months.

• Preliminary reading showed that German CPI was down -0.2% in September and posting zero inflation on yearly basis in September.

Euro dropped sharply to trade as low as 1.119 against Dollar. However as of now recovered from there to trade at 1.123.

Focus in on December or early next year, when ECB might ramp up its asset purchase program, as market participants are convinced that current QE unlikely to bring inflation back. ECB's own projection shows disappointments over current QE program as downside risks increased with Chinese slowdown and devaluation of Yuan.

Rapid slowdown in China might prompt the ECB to pull the trigger early, however there is a growing risk that it would further intensify the currency war.