European inflation surprise buoys Euro

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5 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.

After falling to a fresh 14 year low against the US Dollar on Tuesday the Euro managed to recover some of its losses and trended upwards during the European trading on Wednesday.

Y
esterday’s Composite and Services PMI Indices surged above expectations noting respectively 54.4 and 53.7, comfortably above the level of 50 that denotes expansion. Slight improvements in Service PMIs in all major European economies, with the exception of troubled Italy, were further positive signs. December macroeconomic prints provide a supportive backdrop as we start the most uncertain year in European politics.

Inflation data from the Eurozone showed significant improvement. Preliminary data shows that price increases picked up in December and on a yearly basis rose 1.1% beating expectations of 1% growth. The change in CPI might be partly attributed to base effect of low oil prices on a year previous. Nonetheless, we also saw a small improvement in core inflation, which is less affected by the movement of oil prices as it excludes energy and food prices, which tend to be the most volatile. Improvements in inflation give ECB a little room to breath. However, one has to remember that central bank forecasts that inflation will not hit its ‘close to but below 2%’ target before 2020 according to the ECB’s forecasts.

Major currencies in detail

GBP

The Pound erased all of the previous day losses and ended the day 0.2% higher against the greenback.

Positive print in construction PMI Index helps to maintain optimism on the UK’s macroeconomic front. Construction PMI rose to the highest level in nine months. Impressive construction and manufacturing prints coupled with the data from rest of the European Union might lead to improvement in today’s Service PMI release which is viewed as one of the most important indicators of UK economy, since services account for 80% of country’s GDP.

Monthly services PMI for December will be the main economic release in the UK today. Apart from that the UK’s calendar is empty, political developments around the Brexit process will remain the key driver for the Pound in the coming month.

EUR

Euro recovered from its recent sell-off and ended the session 0.6%higher against the US Dollar.

A pickup in inflation in the Eurozone supported the Euro that recovered some ground after yesterday’s beating. Rising oil prices, which in December climbed above $50 a barrel after OPEC decided to cut production, helped prices to rise above the expectations. However, core inflation also topped expectations. The Euro gave back some of its gains right after the publication of the FOMC Minutes.

Today’s Retail PMI and PPI inflation published in the morning should be mostly overlooked by the markets, which will be more concerned with the publication of ECB Meeting Minutes later today.

USD

The US Dollar index broke its recent uptrend and declined 0.4% on Wednesday.

The minutes from the latest Fed meeting were released yesterday evening. Meeting participants were clearly focused on the potential impact of Trump’s stimulative fiscal policies and expected gradual rate increases. Expectations on inflation were mixed however, and “some” officials took the unusual step of explicitly worrying about the impact of a stronger US Dollar. The immediate impact was bearish on the Euro, which lost some of the day’s gains right after the release.

Thursday is stuffed with notable publications. The most important macroeconomic release today is the ADP Nonfarm Employment Monthly Change. It is just a taste before tomorrow’s NFP release which is arguably the most important macroeconomic piece this week. We expect a weekly publication of jobless numbers and another series of PMI/ISM Indices to be released today.

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