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Euro-zone inflation: a look to February 2013 can explain

Not only did headline CPI remain stable at 0.8%, contrary to expectations for a drop to 0.7%. Core CPI rose from 0.8% to 1%.  These are initial year over year numbers for the month of February. The stronger than expected outcome sent EUR/USD above 1.38 and basically cancelled expectations for the ECB to cut rates in next week’s meeting.

A look to the previous year’s number can provide an answer about the positive surprise, and with a few more questions that arise, the option for a negative deposit rate, which would be terrible for the euro, firmly on the table.

Comparison to February 2013

The Flash Estimate report for February consists only of year over year figures. We do not have the month over month numbers, which are released only with the final CPI figures. Looking back at February 2013, core CPI then surprisingly fell to 1.3% from 1.5% and headline inflation fell from 2% to 1.8%.

Those were negative surprises. Core CPI fell later went up to as high as 1.5% before beginning a long decline that reached a bottom of 0.7% in December 2013.

It seems that because February 2013 was relatively low, February 2014 is relatively high.

German numbers, exchange rate

Initial inflation figures from Germany, the euro-zone’s locomotive, came out below expectations once again. Germany wasn’t alone: also the third largest economy, Italy, disappointed with a y/y rise of only 0.5%, and Spain also reported weaker than expected price rises. Prices are basically flat in Spain. So, where does stronger than expected inflation come from?

The euro is stronger against the dollar, and also against other currencies. With the recent depreciation of the yuan against the US dollar, the euro-zone is also losing out to China in exports, hurting the economies. A higher exchange rate also pushes inflation lower as import prices fall. With no action from the ECB, the euro could go even higher.

How high can EUR/USD go before it falls?

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.