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EU Inflation Declines while Growth Path Remains Solid

Market Analysis

EURGBP, H1

Eurozone Q3 GDP decelerated to 0.6% q/q. The quarterly growth rate was in line with expectations, but with Q2 revised up to 0.7% q/q from 0.6% q/q, the slowdown was unexpected. Eurozone October HICP inflation fell back to 1.4% y/y from 1.5% y/y in the previous month. The number is a tad lower than initially expected, but not a total surprise after the marked deceleration in German HICP reported yesterday to 1.5% y/y from 1.8% y/y in September. There is no breakdown with the numbers yet and while the data confirms that the recovery remains on track, with the annual GDP rate accelerating to 2.5% y/y from 2.3% y/y, it won’t have a direct impact on the policy outlook after Draghi already cleared the policy path until the end of September next year. Still, with the annual rate continuing to move up, the growth path remains very solid with robust job creation and a narrowing output gap that will also lead to rising inflation pressures going ahead, even if headline rates remain low for now.

Eurozone jobless numbers fell back to 8.9% in September while August was revised down to 9.0% from 9.1% reported initially. The September number is the lowest unemployment rate since January 2009 and survey data suggests that job creation continues in the last quarter of the year, as capacity utilisation rises and companies see ongoing robust orders growth.

Meanwhile in the currency market, there was not much of an impact on data release.  The Euro rally of yesterday has run out of puff, since EURUSD is consolidating at around 1.1630 area, with a small upside movement of just 10 pips on Data announcement. However the Pound seems to continue being the  has been the main gainer against Euro since yesterday, with  EURGBP  descending again today into four-week terrain near 0.8800. The cross has not been affected from the data at all.

It seems that the driven is still the Euro Weakness on Catalonian issue and the Brexit negotiation process which is generating headlines in the UK press almost daily but most importantly is BoE November Monetary Policy Committee on Thursday, which will be accompanied by the publication of its quarterly Inflation Report.Following the BoE’s guidance, Sterling markets are fully expecting the central bank to make its first hike of the repo rate in 10 years, taking it to 0.50% from 0.35%, which will reverse last August’s ’emergency’ cut following the Brexit vote, and which is likely to be cloaked in dovish guidance.

Hence on the anticipation of BoE Announcement, the EURGBP could possibly reach 200-Day MA, at 0.8750, while a reversal on the upside might occur after Thrusday.

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Andria Pichidi

Market Analyst

HotForex

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