Weak German inflation vs healthy US data, German inflation slows more than expected, dropping to 1.9%, while strong US macro data, including Q2 GDP growth and jobless claims, supports dollar strength. Euro faces pressure from weak inflation data as EUR/USD drops to 1.1070.
Weak German inflation vs healthy US data
German inflation is slowing more than expected. According to a preliminary estimate from Destatis,
the consumer price index fell 0.1% in August, and annual inflation slowed to 1.9%, compared to 2.3%
in the previous month and the 2.1% expected.
Germany released state-specific data later in the day, and the weak readings put pressure on the
Euro. The weakness in inflation is further evidence of a limping economy. The data will also weigh on
Friday’s Euro-zone CPI estimates. At the start of the week, the average forecast was for a decline
from 2.6% to 2.2%, but after the German data, a slowdown to 2.0% would not be too surprising.
The EUR/USD pair fell back to 1.1070 on the news. Since the beginning of the week, we have seen
negative surprises in other macroeconomic data from the European economy’s locomotive.
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At the same time, macro data from the US continues to be strong. A revised estimate of Q2 GDP
growth is 3.0% from 2.8%, and there is a drop in weekly jobless claims from 233K to 231K.
Continuing claims rose from 1855K to 1868K. In both cases, these are stronger than expected
readings (short-term positive) at historically low levels (long-term positive).
This solid data makes us question the appropriateness of a 50-point cut in the Fed Funds rate in
September. However, the futures market is pricing in a 33% chance of such an outcome (67% in
favour of a 25-point cut), leaving the potential for dollar strength on a reassessment of expectations.
The Fed and the markets are unlikely to make a final decision until after the employment data in early
September and the inflation data in the middle of next month.
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