Thursday’s data may vindicate the ECB for its cautious stance on the withdrawal of stimulus from the Eurozone, but it is less clear what it might mean for the Euro.

Headline Eurozone inflation eased back by 10 basis points to 1.4% during the month, which was in-line with expectations, while core-inflation slipped a larger 20 basis points to 0.9% according to data from Eurostat.

Prices of telecommunications services, clothing and social protection spending were the biggest weights around the ankles of October’s price index.

“The latest CPI figures will do nothing to speed up an interest rate rise by the European Central Bank (ECB),2 says Jacob Deppe, head of trading at Infinox. “Mario Draghi has already clearly stated interest rates will not rise until the Bank has halted its massive €60 billion monthly bond buying programme.”

Thursday’s data come almost exactly a month after the European Central Bank announced it will reduce the size of its quantitative easing (bond buying) program from €60 billion per month down to €30 billion, beginning in January.

"Although the drop in core inflation was partly caused by one-off factors that we assume will be reversed in the coming months, the low inflation numbers have increased the downside risks to our inflation forecast for next year," says Holger Sandte, chief European FX analyst at Nordea Markets. "The transmission process from robust economic growth to inflation is a slow one."

Bond purchases will continue until September 2018 or beyond, according to the bank, which wants to see a sustainable return of inflation toward its 2% target before fully winding down its stimulus program.

“At 1.4%, CPI for October is below the ECB’s 2% target and down slightly on September's figure but it is still a significant improvement on the same time last year,” adds Deppe. “A lower CPI figure and we might have been looking at growing policy divergence amongst central banks as different inflation stories hit the major economies.”

Markets had expected the ECB to have achieved a full exit from its bond market activities by September 2018 and so October’s announcement that QE may continue after this time was seen as bad for the Euro.

Quantitative easing sees the European Central Bank buy bonds on the open market. The idea is that by doing this, market interest rates are forced lower, making new debt cheaper in the hope of spurring economic activity.

“Low inflation and lower inflation than in the US is probably one of the reasons of the recent appreciation of the EURUSD,” says Guy Stear, head of fixed income research at Societe Generale.

The additional economic activity supposedly generated by cheap borrowing, made possible by QE, is then supposed to lift inflation back toward the central bank’s 2% target.

“The reduced QE volume as of January nonetheless seems to be the beginning of the end of the ECB’s ultra-expansionary monetary policy if one assumes that (a) the economic recovery in the euro zone continues – and everything is pointing that way at present – and (b) this leads to higher inflation levels in the long run,” says Ulrich Leuchtmann, head of G10 FX strategy at Commerzbank.

Although Thursday’s inflation data might help to vindicate the European Central Bank for having adopted a cautious stance toward the withdrawal of stimulus from the Eurozone, it is less clear what it might mean for the Euro over the medium term.

“This latter assumption seemed questionable to most market participants for a long time, but since the early summer the market-based long-term inflation expectations for the Eurozone have slowly been rising,” Leuchtmann notes.

The Euro rose sharply against the Dollar during the first half of the week although it began to give back gains late on Wednesday, prompting many to wonder where the exchange rate might go next.

“It is difficult to tell whether this move has come to an end at current levels. At least some EUR-USD level above the ones we saw earlier this week seem to be justified in my view. I therefore consider a collapse back into the mid-1.16s area to be relatively unlikely,” Leuchtmann says.

The Euro-to-Dollar rate was quoted 0.06% lower at 1.1775 shortly after the release while the Euro-to-Pound rate was marked 0.39% lower at 0.8926.

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