German CPI Surprises to Topside; EUR/USD Nears Critical Support
German CPI in August came in flat (0.0%) m/m modestly higher than expectations of a -0.1% showing, marking a dramatic slowdown from the 0.4% rise posted in July as consumer prices remained flat for the second month this year. On the annual front things were a little brighter coming in at 2.4% a tad higher than forecasts of 2.3%. However, despite the slightly better than forecast showing we believe that inflationary pressures in Germany are set to ease back as economic growth slows.
The weakening of inflationary pressures in the German economy go hand in hand with slowdown that we are witnessing in economic activity, highlighted by softening PMI, ZEW and IFO surveys. ECB President Trichet helped confirm this sentiment as he embarked on a dramatic U-turn regarding the outlook for inflation in the EMU yesterday. Trichet his usual post-ECB rate decision press conference said that the outlook to inflation was “no longer to the upside”.
As global growth continues to slow into Q3 and demand for German made goods slumps economic activity in the EMUs largest and most robust economy is forecast to slow significantly. As a result price pressures in Germany are likely to ease and we could see further monthly contractions as the annual figures move back below 2%. The implication on the ECB rate outlooks is relatively simple, with a mandate of keeping inflation in check by hiking rates, as inflation eases any further hikes will certainly be pushed well down the road. There are some forecasting a rate cut in November by the ECB as part of a coordinated effort by central banks to adopt more accommodative monetary policies.
The euro was largely unmoved by the German data as traders continue to digest ECB President Trichet's comments and reassess their positions. On the daily charts we can see just how brutal the post-Trichet sell off was as any hopes for further hikes in the near-term were dashed and the ECB President lowered the growth outlook for the euro-region. The euro is nearing some critical support by 1.3835 marking the lows from July and the outlook for coming days and weeks will depend on how things develop in coming sessions. For full Eur/Usd commentary.
Written by Jonathan Granby, DailyFX Research Team
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.