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Euro Remains Under Pressure as German Inflation Refuses to Budge

Euro Remains Under Pressure as German Inflation Refuses to Budge

Nick Cawley, Strategist

Talking Points

- Annual German inflation unchanged, month-on-month dips lower.

- ECB will need to keep on buying bonds.

- Single currency edges towards 2015 low.

German annual inflation (non-harmonized) remained unchanged in November, according to preliminary data from the Federal Statistics Office, while month-on-month inflation fell to just +0.1% from a prior reading of +0.2%. According to the data, low energy prices continue to weigh, countering marginally higher food and services prices. The final results for November will be released on December 13.

Preliminary Euro-zone inflation data for November is set for release on Wednesday. Analysts expect the Core inflation reading on to stay at +0.8%. The headline rate is forecast to increase slightly from +0.5% to +0.6% (m/m).

Chart 1: Euro-Zone Consumer Price Index (NOV A) (y/y)

Today’s release will add pressure on European Central Bank President Mario Draghi to extend the central bank’s ultra-loose monetary policy next week, adding further downward pressure on the single currency. Expectations are already high that the ECB’s Draghi will extend the €80 billion per month bond buying program for another six months from its original March 2017 end-date at the December 8 meeting (as we've forecast since September).

ECB President Draghi seems stuck between a rock and a hard place as the economy refuses to react to the central bank’s generosity. Speaking at the European Parliament on Monday, Mr. Draghi highlighted the risks that ultra-low interest rates are causing the economy and said that central banks could not generate growth and inflation on their own, a hint to individual countries to start pulling their own fiscal levers.

Chart 2: EUR/USD 5-minute Chart (November 28 to 29, 2016 Intraday)

The prevailing low interest rate environment continues to weigh on the Euro, with EUR/USD edging towards its lowest level since March 2015. Expectations of a Fed Fund rate hike at the FOMC meeting on December 14 are fueling the US Dollar while fears of a ‘No’ vote at this weekend’s Italian referendum continue to haunt the Euro.

Read more: FX Markets Set for Volatility as Political Risk Increases; US NFPs on Friday

--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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