As the first key data sets for December begin trickling through, it is clear that many central banks were prudent in their acknowledgment of downside risks towards the end of last year.
Following US manufacturing PMIs having slipped to a 15-month low, data released yesterday showed Eurozone inflation falling to an 8-month low, likely to be highly disappointing for the ECB.
The data, released by Eurostat, showed headline CPI printing 1.6% year on year in December, well below the prior month’s 1.9% reading and the forecast 1.8%.
The main driver behind the decline was the fall in energy prices which slumped to 5.5% in December, down from 9.1% recorded over the prior month. Outside of the heavy declines seen in energy prices, inflation remained stable at the core level, staying unchanged at 1% over the month.
Oil Prices Causing Concerns
The weakness in oil prices over the last few months, which has seen oil coming off by more than 30% from its 2018 peak, has created a stark obstacle for the ECB in terms of achieving its inflation target. After hitting the bank’s 2% target early last year, inflation went on to peak at 2.2% in Q3 2018 before trailing off and trending lower.
With the ECB having announced an end to its asset purchase program the market is now focusing on the likely timing of the first ECB rate hike. However, with oil prices continuing to slide lower and data continuing to weaken, the chances of an earlier than expected rate hike (first hike currently penciled for H2 2019) are incredibly slim, keeping EUR pressured.
There is currently a conflicting picture in EURUSD. The medium-term bearish channel points to further downside and an eventual bearish break from the current consolidation pattern. However, the RSI indicator is flagging major bullish divergence suggesting the potential for a break to the topside. As such, I’ll be monitoring price action for an opportunity to set longs on a break of the channel high.