Eurozone Inflation Softens but Core Inflation Ticks Higher in December

It was a busy end to the week, with economic data for Germany and the Eurozone drawing plenty of interest.

Early in the session, the German economy was in the spotlight again, with retail sales and factory orders in focus. The stats were mixed, with a larger-than-expected fall in factory orders drawing concern.

In November, German factory orders fell by 5.3% versus a forecasted 0.5% decline. Orders increased by 0.6% in October. In contrast, retail sales increased by 1.1% versus a forecasted 1.0% rise.

The German unemployment rate fell to 5.5% in November, supporting consumer confidence and spending despite the upward trend in interest rates and inflationary pressures.

However, the Eurozone inflation report was the main focal point from the euro area this morning. According to prelim figures, the Eurozone annual inflation rate softened from 10.1% to 9.2% versus a forecasted 9.7%.

According to Eurostat,

• Energy had the highest annual rate at 25.7%, down from 34.9% in November.
• However, food, alcohol, & tobacco prices picked up from 13.6% to 13.8%.
• There were also modest upticks in inflation for non-energy industrial goods (6.4% compared with 6.1% in November) and services (4.4% versus 4.2% in November).

While the annual inflation rate softened, the core annual inflation rate accelerated from 5.0% to 5.2%.

Other stats included retail sales, business confidence, and consumer confidence figures for the Eurozone. However, the stats underwhelmed, leaving inflation numbers to move the dial ahead of today’s US Jobs Report.

EUR/USD Price Action

Ahead of today’s stats, the EUR/USD fell to a pre-stat low of $1.05192 before rising to a pre-stat high of $1.05366.

However, the EUR/USD fell to a post-factory order report and current-day low of $1.04964 in the lead-up to the Eurozone inflation figures. In response to the Eurozone inflation numbers, the EUR/USD rose from a post-report low of $1.05073 to a post-report high of $1.05160.

At the time of writing, the EUR was down by 0.08% to $1.05131.

Up Next

Following the economic data from Germany and for the Eurozone, ECB member chatter will also influence. ECB Chief Economist Philip Lane speaks today. We expect plenty of market sensitivity to today’s comments, with Lane participating in a panel discussion, “Global Economic Outlook.”

While Lane will influence, the US Jobs Report will be the main report of the day. Expect plenty of market volatility, with the jobs report likely to define the Fed’s February policy move.

A better-than-expected increase in nonfarm payrolls, a pickup in wage growth, and a steady or lower unemployment rate would fuel bets of a 50-basis point rate hike in February. According to the FedWatchTool, the probability of a 25-basis point February interest rate hike stood at 58.1% this morning, down from 67.7% one week ago.

The market bets of a 50-basis point interest rate hike were on the rise ahead of today’s Jobs Report.

Later in the US session, ISM Non-Manufacturing PMI numbers will also be in focus. The headline and sub-components, including employment and non-manufacturing prices, will influence.

With a busy economic calendar, we expect increased market volatility. The markets will have to work out the combined impact on Fed monetary policy. Investors should also look out for any FOMC member commentary.