Euro Slips after Inflation Disappointment, White House Trade Threats, as Analysts Warn of Losses Ahead

-Euro slips after inflation disappointment, White House threats.

-Euro surprises on the downside as economist eye scope for deeper fall.

-But Euro lifted by Trump, trade threat, even as analysts warn of losses.

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The Euro pared gains Friday after official data revealed a surprise fall in both measures of Eurozone inflation for August, denting the single currency's lead over rivals on a morning when markets are also wrestling with President Donald Trump's latest attack on the single currency and European Union.

Eurozone inflation rose by 2% during August which, down from the 2.1% seen back in July, was beneath the consensus forecast for the consumer price index to hold steady at 2.1%. 

Core inflation, removes volatile food and energy items from the goods basket and so will provide a more reliable measure of domestically generated inflation pressures, dropped to 1% from 1.1% back in July. Economists had looked for it to hold at 1.1%.

"The decline in the euro-zone’s headline rate was partly driven by energy inflation, which edged down from 9.5% in July to 9.2%, due to past moves in oil prices and the euro. But the core rate also declined, from 1.1% to just 1.0%. This left it in line with its average over the past two years, so there is still little sign that core inflation is on a sustained upward trend," says Jack Allen, a European economist at Capital Economics.

Currency markets care about the inflation data because consumer price pressure have a direct bearing on the interest rate and other monetary policy decisions of the European Central Bank, and it is changes in rates themselves that are the raison d'être for most moves in exchange rates.

Changes in interest rates, or hints of them being in the cards, are only made in response to movements in inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

"Base effects in oil prices suggest that energy inflation will fall further, pulling the overall headline down towards 1.6% at the end of the year. The core rate should edge higher to about 1.3%, but risks are tilted to the downside given still-low goods inflation and a number of one-off factors depressing inflation in services, mainly German education services and French rents," says Claus Vistesen, chief European economist at Pantheon Macroeconomics. 

Capital Economics' Allen also anticipates a decline in energy prices and resulting fall in the headline rate of inflation, back down to 1% or below at some point in 2019, and also say the core rate should creep higher over the coming year. 

"The upshot is that after bringing its net asset purchases to a close this year, the ECB will be in no hurry to tighten policy. We think that it will wait until next September at the earliest before raising interest rates," Allen says, in a note.

ECB chief Mario Draghi sounded an optimistic tone on the outlook for growth and inflation at the end of July, suggesting the bank thinks it is on course to meet market expectations for an interest rate rise toward the end of 2019.

However, Eurozone inflation must first make a sustainable return to the 2% target if the ECB is to be able to raise its interest rate. And while headline inflation has risen from 1.3% at the start of the year to 2.1%, much of this increase is due to a double digit rise in oil prices thus far in 2018.

This means the inflation picture is still not quite what it needs to be for policymakers and, although some economists are forecasting that core inflation will creep higher in 2019, others are more worried about what August's decline will mean for the ECB.

"The question remains whether businesses will dare to increase prices on the back of higher wage growth in times of weakening business confidence. Surveys indicate slower expected price growth in the months ahead," says Bert Colijn, a Eurozone economist at ING Group. "The European Central Bank needs improved core inflation to stay on track for its conditional path towards the end of quantitative easing in December and a rate hike at the end of summer 2019." 

The Euro-to-Dollar rate was quoted 0.01% lower at 1.1667 following the release after reversing an earlier 0.11% gain, while the Euro-to-Pound rate was 0.02% higher at 0.8967 making for a Pound-to-Euro rate of 1.1149. The Euro was also higher against the smaller Dollars but lower against all other G10 currencies. 

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EU Trade Offer: Not Good Enough!

Friday's data comes as concerns over the outlook for international trade, as well as the global economy, come to a head once more. 

"The potential escalation of the US-EU trade wars remains the key risk to EUR as the initial reaction would be EUR negative. All this suggests that the current challenging environment for EM FX should remain unchanged," says Chris Turner, global head of currency strategy at ING Group.

Bloomberg News reported late Thursday that President Donald Trump is eager to push ahead with higher tariffs on Chinese exports as soon as next week, and that it is gearing up for another showdown with the EU. 

He wants to impose a 25% tariff on $200 billion of Chinese exports to the US as soon as a public comment period on the proposed levies comes to an end next Thursday. 

The White House is also reportedly unimpressed by the progress to date in trade talks between the US and European Union, with Trump saying in an interview that the EU is "Almost as bad as China, just smaller,” before again criticising the Euro. 

He reportedly said; “We’re competing against not only, not only the yuan, we’re competing against the euro...They keep dropping, dropping, dropping.”

This comes after Cecilia Malmstrom, the EU Commissioner for international trade, told an EU parliament committee the bloc is prepared to remove all tariffs on US automotives in order to avoid being roped into a trade war.

"EUR traders have to fear that Trump will take a tougher approach on the EU in the future. That increases the uncertainty for the real economy and increases the forecasting uncertainty for the ECB so that the EUR outlook deteriorates somewhat again," says Esther Reichelt, an analyst Commerzbank.

White House hostility follows an earlier agreement between President Trump and European Commission chief Jean-Claude Juncker to negotiate a resolution of differences in order to avoid a Transatlantic tariff fight.

The US had imposed tariffs on imports of steel and aluminium from the EU, drawing retaliatory levies on US motorcycles, jeans and whiskey while prompting threats of even more measures from the White House, this time targeting the mighty European automotive sector.

Thursday's comments that the EU automotive proposal is "not good enough" could now see markets begin to fret that a Transatlantic "trade war" is only a matter of time. 

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China Can't Yield in US Trade Fight say Economists 

The Dollar stabilised close to an August low on Friday as traders await further clarity on President Trump's statements, which have put the so called "trade war" back on top of the agenda for markets.

"The end of the summer in Beijing has brought with it a hardening of views on the trade dispute with the US. Increasingly, tariffs are being seen not as negotiating ploys to win run-of-the-mill concessions from China but as elements of a containment strategy that China cannot afford to give ground to," says Mark Williams, chief Asia economist at Capital Economics. "The high profile that this bleaker assessment is receiving makes it less likely that China’s leadership will seek compromise." 

The comments came as part of an interview in which the US president also renewed criticism of the World Trade Organization, saying he would withdraw the US from it if the international body does not "shape up". It's not yet clear what kind of impact this would have on the world's largest economy.

Originally the proposed tariff rate for China's exports was 10% but this was increased to 25% at the beginning of August. Reports of further action come after US-China talks ended in Washington last week with few signs of any progress.

The White House has announced tariffs on more than $250 billion of Chinese imports, citing the country's failure to address concerns over "unfair trading practices" that include "forced technology transfer and intellectual property theft".

China retaliated with levies on $50 billion of US goods and has threatened to target another $60 billion if the US goes ahead with the next round of tariffs.  

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