Summary:

• German flash CPI m/m: 0.0% vs 0.1% exp 
• US core PCE price index m/m: 0.1% vs 0.1% exp
•  EURUSD drops back towards 1.16 handle following the release

There have been two inflation readings released this afternoon with the German number coming in slightly disappointingly while the US was inline. In month on month terms the latest German data has come in flat with the flash CPI for October showing 0.0% compared to +0.1% expected. In year on year terms this equates to a rise of 1.6% against +1.7% expected and +1.8% previously. 

 

 After peaking earlier this year there is a growing feeling that the pace of increases seen in inflation has dropped throughout Europe. Source: XTB Macrobond

The core reading for the German data is referred to as the HICP and is watched more closely by some traders and analysts. Here, there was perhaps an even greater warning sign with the HICP M/M declining by 0.1% against expectations for a rise of 0.1%. 

This could become a bigger issue with regards to the ECB and monetary policy as just last week the governing Council stated they would keep an accommodative stance until they were confident that inflation had returned to target. 

Before the German release the US core PCE price index for September was announced, with the reading coming in inline with both the consensus forecast and the prior reading of 0.1% M/M. This equates to a 1.6% Y/Y reading which is an improvement on the prior reading and whilst it remains below the Fed’s mandate of 2% it will provide a little support to Yellen & Cos comments that the dip in inflation seen this year is transitory. 

The PCE YoY rose a little in September but the core reading remains an area of weakness. Source: XTB Macrobond

This economic indicator rarely causes a notable immediate move in the markets but is oft cited by the Fed as a gauge of inflation and therefore is worth watching. The CPI release normally causes a larger reaction and along these lines, the PCE is also positively correlated to the CPI. 

 The rise in PCE YoY is in keeping with the recent improvement in the CPI YoY. Source: XTB Macrobond

The EURUSD can be sensitive to both these readings and has now drifted back towards the lows seen last week. Following the ECB decision to extend their Asset Purchase Programme the pair tumbled through prior support at 1.1670 to trade down to a 3-month low. Whilst the market remains below here a head and shoulders setup remains valid. 

 A longer term head and shoulders pattern remains valid in the EURUSD as long as price remains below 116.70. SourcE: xStation