Euro Recovers From Overnight Decline Ahead of German Inflation Data

Key Overnight Developments

• Euro Flat, British Pound Higher in Overnight Trading
• US Dollar Corrects Lower After US-Session Rally

Critical Levels



The Euro yielded a broadly flat result, initially sinking as low 1.4354 only to completely retrace the move by the end of the session. The British Pound trended gently higher, adding 0.1% against the US Dollar. We remain short EURUSD at 1.4881 and short GBPUSD at 1.6648.

Asia Session Highlights



Currency markets proved uneventful in Asian trading, with an empty economic calendar, thin liquidity conditions, and a lack of significant cross-market catalysts leaving the majors to trade near familiar levels ahead of the opening bell in Europe. The US Dollar corrected lower, retracing about half of its intraday rally that began in US hours as the Dallas Federal Reserve’s gauge of manufacturing activity gained the most in two years in December and boosted US rate hike expectations. Indeed, a Credit Suisse gauge of the priced-in yield forecast shows traders are betting the Fed will tack on 102 basis points to benchmark borrowing costs over the next 12 months, the most of any major central bank except Australia and New Zealand.


Euro Session: What to Expect



The preliminary estimate of Germany’s Consumer Price Index is expected to show that the annual pace of inflation accelerated for the second consecutive month in December, rising 0.7%. As with the previous month, higher oil prices are will likely account for the majority of the upswing. Indeed, crude has more than doubled over the past 12 months. A return to positive (if modest) price growth is welcome news for the European Central Bank, suggesting the currency bloc may be able to avoid a debilitating period of deflation without implementing additional monetary stimulus measures.

That said, a move to raise rates still seems quite remote as Jean-Claude Trichet and company struggle to reconcile competing needs of relatively better-off countries like Germany and France with far more damaged economies like Spain and Greece. Indeed, tightening monetary conditions now as several Euro Zone countries sharply cut back government spending to rein in their deficits would severely widen the rift between rich and poor countries within the currency bloc, likely producing a harsh political response that could conceivably endanger the structural integrity of the single currency.

Switzerland’s UBS Consumption Indicator is likely to gain for the consecutive month in November after new car registrations and consumer confidence, both key inputs in the index, gained over the same period.

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