Euro recovers after three year high German inflation data

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31 January 2017

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Euro sank to its weakest position in almost two weeks against the US Dollar on Monday, before rebounding over the course of trading amid a particularly busy day of economic news across both sides of the Atlantic.

T
he single currency rebounded from its lowest level since 19 January after the release of a slightly encouraging set of inflation data in Germany that boded well for this morning’s Euro-wide release.

Inflation in Europe’s largest economy rose to a three-and-a-half year high 1.9% in January from the 1.6% recorded in December (Figure 1), albeit coming in slightly below forecast.

Figure 1: German Inflation Rate (2013 – 2017)

Meanwhile, the US Dollar appeared to shrug off concerns stemming from Donald Trump’s temporary ban on entry of refugees over the weekend, which sparked widespread criticism and protests across the US. Investors will be focusing heavily this week on Trump headlines, as well as Wednesday evening’s Federal Reserve monetary policy announcement. Interest rates are almost certain to be held, although we expect hints that further hikes are on the way this year.

Sterling ended the day lower across the board ahead of the Bank of England’s first “Super Thursday” of the year this week. The central bank will announce its interest rate decision and Quarterly Inflation report on Thursday, although is widely expected to add little in terms of new information from the previous meeting.

The Turkish Lira also rallied sharply over the course of trading yesterday, despite credit rating agency Fitch slashing the country’s investment-grade rating to junk after trading on Friday. With the decision heavily priced in, investors took heart from Fitch’s slightly less dour assessment of Turkey’s economy.

Major currencies in detail

GBP

Sterling fell by 0.65% against the US Dollar as markets opened for the week.

The Pound was driven largely by external factors with very little news out of the UK on Monday. Investors have begun to turn their attention to the BoE meeting on Thursday. The sharp rise in inflation since the Brexit vote has caused most onlookers to expect a slightly more hawkish tilt from the central bank when Governor Carney presents the meeting minutes and Quarterly inflation report.

Housing data this morning is not likely to be a market mover. The Bank of England will take centre stage when it meets at midday on Thursday.

EUR

The Euro recovered from its early losses yesterday to finish London trading unchanged against the US Dollar.

Consumer and business confidence data released yesterday was largely impressive, adding to the general optimism following the release of January’s German inflation numbers. Consumer confidence rose to -4.7 this month, while the economic sentiment indicator from the European Commission also rose above expectations to 108.2 from 107.8.

A busy day of economic data in the Eurozone will see the release of the latest GDP, unemployment and inflation figures this morning. Inflation is forecast to have accelerated to 1.5% in January, which would significantly less the burden on the European Central Bank to ease its monetary policy further in the coming months.

USD

The US Dollar index rallied to a ten day high, although slipped up as the session progressed to end just 0.1% higher.

Economic news on Monday came in largely in line with expectations. Consumer spending rose by a solid 0.5% in December, pointing to an improvement in domestic demand that could spur an acceleration in growth in the first few months of 2017.

The personal consumption expenditure price index, the Federal Reserve’s preferred measure of inflation in the US, also rose last month to its strongest reading in almost two years. The measure of inflation increased to 1.6% year-on-year from 1.4% a month earlier, just shy of the Fed’s elusive 2% target.

Consumer confidence data at 15:00 UK time will garner the most attention in the US today. Any and all headlines regarding the Donald Trump administration will remain key ahead of Wednesday’s Federal Reserve meeting.

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