Eurozone inflation surge unlikely to help euro - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the surge in German CPI yesterday was notable with the annual EU Harmonised CPI rate jumping from 0.7% in November to 1.7% in December versus a consensus of 1.4%.

Key Quotes 

“That has nudged expectations higher today for the euro-zone CPI rate, which is now expected to increase from 0.6% to 1.0%. The German state-by-state data suggests a large portion of the German increase was energy related with heating oil prices up as much as 20% in some states. However, the larger than expected gain suggests non-energy prices may also have played a role.”

“If increases outside of energy were due to say airfares, which are volatile, the market reaction is likely to be limited. So in that regard, the core CPI rate will be the key focus in the euro-zone data this morning and there are upside risks to the 0.8% consensus.”

“Still, higher inflation now is unlikely to help the euro. The ECB has just tied itself into an extended QE program through to year-end so if anything higher inflation that pushes real yields lower may serve to undermine the euro. While higher inflation raises the prospect of QE ending in 2018, that is too far away to influence euro direction at this stage.”