Euro Exchange Rates Suffer on German + Eurozone Inflation Data, More ECB Action Ahead
The new year starts off with all-important inflation numbers for the euro family - and the European Central Bank won't be happy with what has been delivered.
The euro has failed to capitalise on its December dominance in global FX markets at the start of 2016 after German and Eurozone inflation data came in softer than forecast.
Monthly German inflation data read at -0.1%, a figure of 0.2% was expected. The currency fell back against both the pound and dollar when the data was announced.
24 hours later Eurozone inflation for the year to December read at 0.2%, a higher figure of 0.3% was expected.
The euro is on course for another day of declines thanks to the numbers.
The euro to dollar exchange rate (EURUSD) needed something to push it out of recent ranges - these figures could be the catalyst that sends it back towards 1.05.
The euro managed to gain against the dollar in December but advances were front-loaded towards the start of the month.
The euro to pound sterling exchange rate (EURGBP) is meanwhile failing to continue its December uptrend with resistance at 0.74 combining with the underwhelming inflation numbers to halt further advances.
The conversion has failed to break above the 0.74 level on three occasions in 2015 and there is little to suggest now is the time for such a move higher.
At the time of writing the inter-bank conversion is seen at 0.7333 while high-street banks are offering payments at around 0.7040-50. Independent providers are delivering rates significantly closer to the market at 0.7280.
EUR to USD Outlook: Back Towards 1.07?
"The pair has consolidated after the violent price action, and position cleanse, in response to last month’s ECB disappointment. IMM still suggests speculators are short, and the late USD rally in the final session of last year, and overnight market moves, reinforce the volatile nature of trading conditions," say Lloyds Bank.
Analysts at the bank do however note there now appears to be scope for the currency to move relatively freely in either direction.
A firmer than expected inflation print could see limited EUR strength; 1.1000/10 and 1.1040/50 (which incorporate the highs in Dec-15 and the 100 and 200dmas) provides significant resistance to the topside.
A below consensus print should see a test of support at 1.0830/00; a break through here opens up further downside, back toward 1.0750 suggest Lloyds.
The ECB Needs Inflation
The world remains characterised by low inflation thanks to supressed energy prices.
Policy-makers would rather have inflation set around the 2% level as this is deemed as healthy enough to keep economic trajectory stable - it is widely argued consumers will eventually stop spending in anticipation of ever-lower prices which could induce economic weakness.
The ECB President Mario Draghi has himself also warned recently on a number of additional risks posed by low inflation. 2015 saw the eurozone toy with deflation and the response from the ECB was agressive - they cut interest rates and increase money flow to try and boost prices.
"Lower inflation despite less drag from energy prices will not be welcomed by the ECB. Core inflation trends sideways. More easing is likely," says Oystein Dorum at DNB, Norway's largest financial group.
These actions hit the euro hard and should inflation not rise back towards the 2% level soon the ECB could strike once more.
“Despite relatively aggressive policy measures last month at his press conference, notably cutting the deposit rate and extending Quantitative Easing, inflation woes are not easing for Draghi," says Alex Lydall, Senior Sales Trader at Foenix Partners.
The bottom line? Expect the ECB to act in 2016 - this could well be the catalyst that sends the currency to parity with the dollar.