The sharp devaluation in the euro and the rapid acceleration in economic activity will mean short-term inflation dynamics in the eurozone will soon start surprising to the upside.  In this context it is important to remember that the only justification for ECB sovereign bond purchases was the fact that inflation expectations had become de-anchored.

Spain’s economy is now accelerating rapidly:

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Even Spain is now able to sell debt at negative yields:

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This is building inflationary pressures.  Once the inflation outlook in the eurozone changes those who opposed the policy in the first place will surely attempt a comeback.  Legally, the ECB could not continue with QE if there is not considered to be a deflation risk. Challenges to the programme will only grow as bond yields turn more negative.  Investors should be alert that a tapering debate at the ECB could begin very soon.  They should think carefully about what will happen to Spanish and Italian yields, and European assets as a whole, under an ECB tapering scenario, and adjust their exposure accordingly.