Daily Forex Market Report 4-Jan-2023: Germany’s single-digit inflation reading blindsides Euro, stages rebound against USD

A lot of noise was made around Germany’s single-digit inflation reading yesterday.

Coming in at 9.6%, it was a sharp fall for Europe’s largest economy, which peaked at 11.6% in October.

“Headline inflation in Germany seems to have reached its peak and, unless there is another large surge in energy prices, double-digit inflation numbers should be behind us for a long while,” said ING Bank’s Carsten Brzeski.

Responding to the surprise reading, the EUR/USD pair fell 1.2% to close Tuesday’s session at 1.054, while EUR/GBP dipped a more modest 0.4% to 88.11p.

EUR/USD regains its composure – Source: capital.com

Investors seemed to flee from the currency markets to equities on the prospect of a softer forward policy from the European Central Bank; all because of a single data point.

“The problem with all this is, a single data point won’t change the ECB’s policy stance,” said Ipek Ozkardeskaya at Swissquote. “More importantly, yesterday’s German CPI (consumer price inflation) data was because the government paid some energy bills, and the headline figure obscured the increase in food costs across the country, along with tighter than expected job conditions, which could also make inflation stickier than ideal.”

We’ve already seen a correction this morning, with EUR/USD heading back up to 1.058, although EUR/GBP has remained flat, with a spinning-top candlestick pattern forming on the daily chart.

Cable closed lower on Tuesday but has made headway in this morning’s Asia window, adding 0.4% to 1.201.

We should get some insights into the US Federal Reserve’s forward policy when the Federal Open Market Committee minutes are released later today.

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Employment data also failed to impress, while the goods trade balance widened its deficit more than expected.

As such, Federal Reserve chair signalled a slower pace of interest rate hikes in the months to come.

"It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” said Powell, though he did note that the terminal rate could be "somewhat higher" than the 4.6% indicated by in the September projections.

EUR/GBP closed the Wednesday session at .863, around 12 basis points below the intraday high, though the euro has the slight upper hand this morning having added a few pips.

Yesterday’s EU headline inflation data came in at a flat 10% against a 10.3% forecast, though that figure is still unacceptable high given the 2% target, so excessive rate hikes are likely to stay on the agenda in the coming months.

Combined with Powell’s dovish overtures, EUR/USD jumped a full percentage point to 1.042 yesterday, and continued to rally another 0.33% to 1.045 in today’s Asia window.

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