Title: German Inflation Falls Below Expectations, Pressuring the Euro
Source: Original reporting by XTB Market Analysis Team
Link: https://www.xtb.com/int/market-analysis/news-and-research/breaking-german-inflation-comes-in-significantly-below-expectations-eurusd-slips
Date: May 29, 2024
Author: XTB Market Analysis
Summary:
German inflation data for May 2024 revealed a larger-than-anticipated cooling in consumer prices, prompting a modest drop in the euro against its major counterparts, particularly the US dollar. Market participants are increasingly pricing in a potential shift in monetary policy from the European Central Bank (ECB), possibly beginning as early as June. Forex traders responded to this inflation surprise with rapid recalibration of interest rate expectations, pushing EUR/USD lower as the week progressed.
German Inflation Report – Key Figures and Analysis
Germany’s preliminary Consumer Price Index (CPI) data for May 2024 reflects a sharp deceleration in inflation:
– Headline inflation (year-over-year) came in at 2.4 percent
– This compares to April’s figure of 2.2 percent year-over-year
– Analysts had expected a 2.7 percent rise in annual inflation
– On a monthly basis, CPI rose only 0.1 percent
– Expectations were centered around a 0.2 percent monthly rise
These figures come just before the final Euro Area inflation data release and may act as a leading indicator for the larger monetary bloc. Given Germany’s position as the largest eurozone economy, its inflation trends carry significant weight in European Central Bank policy discussions.
Details by Region and State
The German CPI is initially compiled at the state level. The data from several federal states indicated broad-based moderation in price growth. Here are some key insights from major states:
– North Rhine-Westphalia: Year-on-year CPI at 2.3 percent, down from 2.5 percent in April
– Bavaria: Year-on-year CPI at 2.2 percent, compared to 2.5 percent in the previous month
– Hesse: Year-on-year CPI at 2.4 percent versus 2.7 percent prior
– Baden-Württemberg: Annual inflation slowed to 2.5 percent from 2.8 percent in April
– Saxony and Brandenburg also showed similar disinflationary trends
The figures mark a consistent decline in inflation across all major federal states in Germany. This reinforces the conclusion that the momentum behind consumer price increases is fading on a national level.
Market Reaction in Forex
The immediate response in the forex markets was a weakening of the euro. EUR/USD, which had earlier shown signs of resilience, slipped below the 1.0850 mark following the inflation report. Investors reassessed their assumptions about the ECB’s policy path, fueling expectations that a rate cut could arrive sooner than previously assumed.
Key points from the forex market include:
– EUR/USD fell by approximately 30 pips within hours of the data release
– Euro weakened not only against the dollar but also against other major currencies like GBP and CHF
– German 10-year bund yields dropped by around 6 basis points to 2.52 percent following the report
– ECB rate cut odds for June futures increased significantly, pricing in a nearly 90% chance of easing
The euro’s decline illustrates the sensitivity of FX markets to inflation surprises, particularly when the euro area is entering a critical monetary policy juncture.
ECB Rate Expectations Shift Further
The ECB has repeatedly emphasized its data-dependent stance, indicating that sustained disinflation could warrant a monetary response. Following Wednesday’s German CPI report, money markets began to accelerate expectations for interest rate cuts.
Key takeaways on interest rate outlook:
– Markets are now almost fully pricing in a 25 basis point cut at the ECB’s June 6 policy meeting
– A second rate cut later in 2024 is gaining probability based on
Read more on EUR/USD trading.