Euro Shrugs Off Weaker Inflation After ECB Tapering Seen Unaffected

Euro area inflation dissapointed for September while Sunday's independence referendum in Catalonia, Spain may weigh on the common currency further into the session. 

The Euro shrugged off a disappointing set of inflation numbers Friday, holding hold ground against its rivals, after economists said the September data will not prevent the ECB from an October decision to taper its QE program.

The headline rate of inflation held steady at 1.5% during the current month, according to Eurostat, while the all-important core-inflation measure slipped 10 basis points to 1.1%. 

However, consensus had forecast headline inflation to rise by 10 basis points to 1.6% and the crucial core number to remain stable at 1.2%.

Energy prices were seen as the key source of support underpinning the headline measure. Core inflation excludes volatile energy and food prices from the basket and so is seen as a more reliable measure of organic price pressures.

"Today’s weaker-than-expected euro-zone inflation data won’t stop the ECB from announcing in October its plan to taper its asset purchases next year," says Jack Allen, a European economist at Capital Economics.

The Euro was quoted at 1.1792 against the Dollar shortly after the release, up 0.11% on the day. Against the Pound, the common currency was changing hands 0.63% higher at 0.8830 after a similarly dissapointing data emerged from the UK a short time before. This makes for a Pound-to-Euro rate of 1.1329, down 0.61% so far into the morning session.

"Wage growth picked up in Q2, and the labour market has strengthened further since then," Allen adds. "Indeed, other data released this morning showed that the national measure of unemployment in Germany fell to 5.6% in September, a new post-reunification low."

Euro area growth has strengthened during the year to date, prompting the European Central Bank to begin contemplating an exit from its ultra-loose monetary policy position and leading to strong gains for the Euro.

"The recent upside trend in Euro-area core inflation paused in September. However, the robust economic outlook suggests this to be only temporary. The ECB tapering decision in October is still in the cards," says Tuuli Koivu, an economist at Nordea Markets.

The common currency is up around 14% against the greenback for the year to date, although a meaningful portion of this increase is also the result of Dollar weakness.

Markets now await a decision from the ECB on how, and at what pace, it will begin to wind down its quantitative easing program (bond buying), which it launched in 2015 as part of an effort to boost inflation.

QE is believed to work by pushing down market interest rates, which reduces borrowing costs in the real economy, to spur economic activity. However, concerns over the impact a stronger currency might have on the Eurozone’s inflation prospects are now centre stage.

ECB president Mario Draghi told the European Parliament Economic and Monetary Affairs Committee last week that the recent volatility in the exchange rate represents a source of uncertainty that requires monitoring.

"Downside risks continue to exist, mainly related to global factors and developments in foreign exchange markets."

The European Central Bank is expected to set out the details of its exit from QE at its October meeting.