EUR continues north following inflation numbers

EUR continues north following inflation numbers

 

Summary:

  • EURUSD rose to 1.1430 following inflation prints from Spain and Saxony
  • The most important data from Germany is expected 1:00 pm BST
  • EURUSD could rise to 1.15 if inflation turns out to be better than expected

Analysis:

The shared currency rally continues after first inflation prints from Germany and Spain showed that an improvement in inflation could be expected this month. 

Let’s begin with Germany. While the headline print for the whole economy is published 1:00 pm BST, regional data due earlier should show whether prices rose faster last month. Prices rose by 1.7 per cent in Saxony on the year in June, up from a 1.6 per cent gain in May. On the month, prices rose by 0.2 per cent, from a 0.1 per cent decline in May. Other regions are due to report over the rest of the day.

Now let’s move to Spain. Spain has become the latest EMU member to report a big drop in its annual inflation rate, though the fall was slightly less severe than economists had forecast. Consumer prices were flat in June on an EU-harmonised basis, which brought the country’s annual inflation rate down from 2 per cent to 1.6 per cent. The decline was driven mostly by changes in fuel prices. That was a bit better than consensus forecasts of 1.5 per cent, but still marked the weakest figure since November. Although early figures from Germany suggest a slight uptick in inflation in the eurozone’s largest economy this month, data from Italy yesterday showed a similar pullback to Spain.

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Hawkish comments and better perspectives for inflation pushed German yields close to the highest level since QE has started. However, the spread between EU and US rates points to a fair value of the EURUSD at 1.12. source: Bloomberg

 

The euro moved higher and German government bonds also fell – which was another sign that traders sense growing impetus for shift towards pulling back monetary stimulus in the euro area. The move comes after Mario Draghi striked a hawkish tone during the conference that was organized by the ECB. While some rumours occured yesterday that the market misjudged Draghi’s comments, the euro didn’t care and rose above 1.14 for the first time this year. What’s more, looking at the chart it’s hard to expect that the rally may stop shortly. The next resistance lies at 1.1500 and it’s possible that we could see a correction there. That means that the EURUSD still has an upside potential in the near term, especially if German inflation comes better than expected. 

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 EURUSD could rise to 1.150 in the short term if German inflation beats expectations. source: xStation5

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