Low German and French inflation weakens the single currency

Enrique Díaz-Álvarez12/Dec/2014Currency Updates

GBP

A dramatic slowdown in house prices caused the Pound to fall as markets opened on Thursday, eventually finishing the day 0.1% down on greenback.

The RICS housing price slowed to an eighteen month low in November according to a report released yesterday. UK house prices grew by just 13% during the past three months, down 20% from the month before. Economists had expected the monthly index, which measures surveyor’s view of price trends, to fall but less sharply to 17%. Chief Economist at RICS Simon Rubinsohn did, however, highlight the potential benefits that the recent stamp duty reform announced by George Osborne would have, potentially reversing the softer trends in buyer enquiries.

The release most likely to cause most volatility from the UK today will take place at 10am, with the Conference Board’s Leading Economic index, a measure of future trends in overall levels of economic activity.

EUR

The single currency declined dramatically versus its major peers, by 0.6% on the Pound and 0.7% on the Dollar after more weak inflation figures were released from the Eurozone’s two largest economies.

Inflation in Germany has remained stubbornly low in November, dropping, as expected, to a meagre 0.6% on an annualised basis after it remained stable month on month. A prolonged drop in oil and fuel prices and stable food prices had contributed to the low levels of November inflation. Concerns over future drops in oil prices look set to send the Eurozone into an even worse deflationary spiral. Inflation in France sank to yet another five year low, down to 0.4% YoY in November, down 0.1% on the previous month. Even more worrisome, the core measure of inflation is now at -0.2%, down from stable in October. Elsewhere, the ECB monthly report also highlighted concerns over oil prices and its effect on inflation, re-iterating Mario Draghi’s comments last week on re-assessing its monetary policy stance in early 2015.

The week draws to a close with a busy day of data releases in the Eurozone. The main announcements will be the employment change and industrial production figures from Eurostat at 10am London time.

USD

Dollar strength returned on Thursday with the currency climbing by 0.7% on its major counterparts.

US consumer spending showed a strong improvement in November increasing by 0.7%, well above the 0.4% that was forecast. Lower oil prices gave the holiday shopping season a boost and underlined further strength in the US economy. Particularly strong was the increase in online receipts, which rose by 1%, while sales of electronic appliances climbed by 0.9% during the same period. This, however, was offset slightly by service station sales which fell by 0.8% as a result of the recent decline in oil prices. In other releases, import prices fell by 2.3% last month, while export prices also fell, although only marginally, by 1%. Initial jobless claims surprised economists by posting a decline last week for the second consecutive week to just 294,000.

Today sees the release of the Producer Price index for the US in November at 1:30pm, followed later by the Reuters Consumer Sentiment index.

Rest of the world

Just six weeks after the central bank raised its benchmark interest rate from 8% to 9.5%, the Bank of Russia has again decided to hike rates in a bid to tackle inflation and stem the plunging Ruble. Interest rates were increased by a further 100 basis points on Thursday to 10.5% and comes a day after the bank admitted it had intervened to support the Ruble. The currency lost 1.8% of its value over the course of the day. In contrast, the Norwegian central bank slashed its interest rate for the first time in more than two years to just 1.25%, having been unexpectedly cut by 25 basis points on Thursday.

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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.