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Euro Remains Under Pressure as German Inflation Refuses to Budge

Euro Remains Under Pressure as German Inflation Refuses to Budge

2016-11-29 14:10:00
Nick Cawley, Analyst
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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)

Euro Remains Under Pressure as German Inflation Refuses to Budge

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)

Euro Remains Under Pressure as German Inflation Refuses to Budge

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

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