- Germany’s statistics agency, Destatis, will publish the CPI data on Thursday.
- Headline CPI is set to rise by 2.1% YoY in August.
- The ECB is still far from decided over a move on rates in September.
The European Central Bank (ECB) is scheduled to meet next month for its monetary policy review, making the upcoming Harmonized Index of Consumer Prices (HICP) inflation data from Germany, set to be released on Thursday, particularly significant for its potential impact on the central bank’s policy decisions.
Meanwhile, the Euro (EUR) may relinquish part of its recent strong upward trend, particularly against the US Dollar (USD), if the inflation data from Eurozone economies, especially Germany, indicates a persistent disinflationary trend.
What can we expect from the upcoming German inflation report?
The Federal Statistical Office of Germany (Destatis) will release the official data on Thursday. The annual German Consumer Price Index (CPI) is projected to rise by 2.1% in August, down from the 2.3% increase reported in the previous month. Monthly CPI inflation is expected to show a humble increase of 0.1% during the reported period.
Germany’s annual Harmonized Index of Consumer Prices (HICP), in the meantime, is anticipated to drop to 2.3% in August, down from 2.6% in July. The monthly HICP is likely to come in flat last month, compared to a 0.5% increase in July.
A further cooling of inflation in Europe’s largest economy could suggest softer inflation readings for the entire Eurozone, which will be published on Friday. On this, the headline Eurozone headline CPI is expected to rise by 2.2% in the year to August, a slowdown from the 2.6% increase seen in July, while the core inflation, which strips food and energy costs, is also projected to decrease to 2.8% during the same period, down from a 2.9% uptick in the previous month.
On Tuesday, Dutch policymaker Klaas Knot argued that the European Central Bank (ECB) could gradually lower interest rates as long as inflation is expected to reach its 2% target by the end of 2025 at the latest. He expressed his comfort with gradually easing off the brakes, provided that the disinflation path continues to align with a return to 2% inflation by that time. Knot also mentioned that he would need to wait for the complete set of data and information before deciding his position on whether a rate cut in September would be appropriate.
This cautious tone followed comments from ECB Chief Economist Philip Lane over the weekend, who remarked that it is not yet guaranteed that the central bank will successfully reduce inflation back to its 2% target, indicating that a restrictive monetary policy remains necessary. Lane also emphasized that the monetary stance must remain in restrictive territory for as long as necessary to guide the disinflation process towards a timely return to the target. However, he also cautioned against maintaining high rates for an extended period, as this could result in persistently below-target inflation.
Ahead of the release, TD analysts noted: “Heavy base effects in the energy components will help headline inflation get close to target in the eurozone—in the EZ, the headline rate will likely come down all the way to 2.1% y/y, whereas German HICP inflation should fall to 2.2% y/y. Core inflation should remain sticky though, but remain on a disinflationary path."
When will the HICP inflation report be released, and how could it affect EUR/USD?
The preliminary HICP inflation report for Germany is scheduled for release at 12:00 GMT. In the lead-up to this inflation data release, EUR/USD seems to have lost some upside impulse after hitting fresh 2024 tops just above 1.1200 the figure at the beginning of the week.
Markets have now pencilled in around 100 bps of easing by the US Federal Reserve (Fed) in the latter part of the year, with the kick-start of its easing cycle coming as soon as September. However, it is not that clear that the ECB will follow suit, as per recent prudent comments from rate-setters. So far, the broader debate seems to have shifted towards the health of both economies, where the US clearly exhibits a decent advantage.
If the headline and core inflation data come in hotter than expected, it could bolster expectations for one more ECB rate hike in the next few months, lending support to the European currency and therefore opening the door to the continuation of the ongoing uptrend in EUR/USD. On the flip side, a negative surprise, that is, an acceleration of the disinflationary trend, will carry the potential to remove some strength from the Euro and thus unveil a probable reversal to lower levels.
Pablo Piovano, Senior Analyst at FXStreet.com, notes that the surpass of the 2024 peak at 1.1201 (August 26) could prompt the pair to embark on a probable trip to the 2023 high of 1.1275 (July 18), seconded by the 1.1300 milestone.
In case of bearish attempts, Pablo suggests that there should be initial contention at the weekly low of 1.0881 (August 8), which appears reinforced by the provisional 55-day SMA at 1.0879 and comes before the critical 200-day SMA of 1.0851.
All in all, the pair’s constructive bias is expected to persist as long as it trades above the key 200-day SMA, concludes Pablo.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD stays weak below 1.1100, awaits German inflation data
EUR/USD stays under bearish pressure in the European session on Thursday and trades below 1.1100 for the first time in over a week. Soft inflation readings from German states weigh on the Euro as market focus shifts to Germany's national inflation data and US GDP report.
GBP/USD struggles near 1.3200 on renewed USD strength
Following a short-lasting recovery attempt, GBP/USD loses its traction and trades near 1.3200 in the European session on Thursday. The cautious market mood lifts the US Dollar ahead of top-tier data releases and drags the pair lower.
Gold rises on revival of China demand
Gold trades about half a percent higher in the $2,510s on Thursday, gaining a lift from data showing demand from China increased in July – its first month of gains since March 2024.
Germany inflation expected to ease further as another ECB rate cut hangs in the balance
The ECB is scheduled to meet next month for its monetary policy review, making the upcoming Harmonized Index of Consumer Prices inflation data from Germany, set to be released on Thursday, particularly significant for its potential impact on the central bank’s policy decisions.
Three fundamentals for the week: Focus on the fragility of the US economy Premium
US Consumer confidence data will provide a gauge of how consumers are feeling. Jobless claims are in focus after Fed Chair Powell's dovish speech. Investors will look to the core PCE index to confirm that inflation is falling.
Moneta Markets review 2024: All you need to know
VERIFIED In this review, the FXStreet team provides an independent and thorough analysis based on direct testing and real experiences with Moneta Markets – an excellent broker for novice to intermediate forex traders who want to broaden their knowledge base.