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EURUSD Nudges Higher on Inflation Data, Eyes ECB Meeting

EURUSD Nudges Higher on Inflation Data, Eyes ECB Meeting

Nick Cawley, Strategist

Talking Points

- Annual euro-zone inflation confirmed at 1.1% in December, the highest level since September 2013.

- ECB ultra-loose monetary policy and higher energy prices fuel price pick-up.

- See the DailyFX Economic Calendar and see what live coverage for key event risk impacting FX markets is scheduled for next week on the DailyFX Webinar Calendar.

Inflation in the euro-zone continued to perk-up in December, rising to 1.1%, compared to 0.6% in the previous month, the highest level since September 2013. Core inflation, the ECB’s preferred reading, was confirmed at 0.9%, a fraction higher than November’s 0.8%. The pick-up in prices was driven by a sharp rise in energy costs and imported inflation via a weaker euro.

Energy prices have risen sharply in the last year after oil bottomed-out in mid-January 2016. The recent 18-month high in the Brent Crude came after OPEC and non-OPEC members hammered out an agreement to cut back production late last year.

Chart: Brent Crude 3-Hour Timeframe (January 2016-January 2017).

While the pick-up in inflation will be welcomed by ECB President Mario Draghi, and another jump to around 1.5% is expected over the next couple of months, it is still unlikely to hit the central bank’s target of close to 2%, leaving the single currency at risk of further weakness.

Analysts expect President Draghi to maintain policy measures at Thursday’s ECB meeting in order to stoke further economic activity across the euro-zone. In December the central bank committed to further quantitative easing by announcing it would extend its bond buying program from March 2017 until the end of the year, albeit at a reduced monthly rate of EUR60 billion, down from EUR80 billion. Post-announcement the Euro fell to a 13-year low against the US Dollar on a combination of lower-for-longer rates in the euro-zone and expectations of further monetary tightening in the US.

Chart: EURUSD 1-Hour Timeframe (September 2016 – January 2017).

--- Written by Nick Cawley, Analyst

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

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