Thursdays’ inflation report shows a negative number for the second month in a row. The inflation report is a eagerly monitored by the European monetary policy setters, because the ECB is in a continual fight against deflation. If we dig a little into the topic, we can see that the recent poor figures are mostly driven by the low oil (energy) price. Its influence can be analyzed by looking at the core inflation rate, which excludes the prices of energy*. The core inflation rate actually rose in the Euro area from 0.8% to 1.0%, while the inflation rate is down 0.1%. We can see that both numbers differ a lot from each other, so is the oil price dictating the key interest rate in Europe?
This is a valid asked question and cannot be answered with any great certainty. However, a low oil price and a low inflation rate is a little bit of a gift for Europeans because of a cheaper refinancing of the nations in Europe with higher levels of debt. It makes absolute sense to hold the key interest rate low, instead of looking on the core interest rate. Also the Euro remains strong, especially after Janet Yellen’s speech which alluded to the fact that the raising of the key interested rate in the USA will be more limited than the forecast this year. This comes after the unemployment rate in US was not as good as forecasted.
If we take a look at the EURUSD chart from a technical perspective, the EURUSD is rising up into the resistance area which has established over the whole past year. It will be very interesting to see how the EURUSD will handle this area, and whether we will see a breakout over this area proving a clue for a further higher move. Trend traders especially might find this be a good chance for a larger profit.
For fundamental traders it will be much harder to profit from a larger move because they have to interpret the next steps from both the ECB and the FED – which is very tough because we have seen a lot of unexpected decisions. This is the big advantage of technical trading. We do not have to establish an opinion where the market will move we just follow the price.
*The core inflation rate excludes prices of energy, food, alcohol and tobacco