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Boost for Euro Exchange Rate as Eurozone Inflation Leaps

Euro and inflation

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The Euro exchange rate complex was put on a firm footing following the release of some better-than-forecast Eurozone inflation data on Wednesday January 4.

Eurostat announced Eurozone inflation for December stood at 1.1% on an annualised basis, up from the 0.6% reading seen previously.

A sharp jump in fuel prices was one of the key drivers of the jump in the headline number as Core CPI read at 0.9%; it was forecast to read at 0.8%.

The data will nevertheless be cautiosuly welcomed by the European Central Bank (ECB) who are tasked with ensuring inflation remains around 2% over the long-term.

The ECB has for years been cutting interest rates and printing money to try and get inflation back up to 2%.

A notable side-effect of these efforts has been a large fall in the value of the Euro as lower interest rates tend to see Euros exported across the world by investors seeking higher-yielding investments elsewhere.

Therefore, because the latest set of inflation data beat expectations the Euro has benefited as traders cautiously bet the ECB might have to pare back their stimulus programme in 2017.

Such moves would likely encourage a notable repatriation of capital to the Eurozone, in the process driving the Euro higher.

“Today’s preliminary figures shows inflation across the Eurozone surged to the highest level since late 2013 in December, reflective of the three-year high in German consumer prices released yesterday. This latest data could mark the beginning of the end to ECB’s bond-buying programme and expansive monetary policy as it edges closer to their inflation target of two percent," says Paul Sirani, Chief Market Analyst at Xtrade in a note seen by Pound Sterling Live.


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However, Sirani does caution that everything may be as rosy as it seems, "Despite these positive numbers, weakness in the price of everyday goods continues to be masked by rising oil prices in the wake of continued Brexit uncertainty."

Furthermore, questions will be asked as to whether the ECB is in fact willing to ease back on their supportive policies in a year crowded with elections which could deliver some unforseen shocks. 

"The hawks could well be looking for Draghi to rein in and tighten policy, however with a calendar full of elections across the Eurozone in the year ahead, and double digit unemployment in some areas any tightening still looks to be a long way off," says Fiona Cincotta at City Index.

We would therefore expect any boost to the Euro provided by the inflation data to be relatively short-lived.

 

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