In another sign that record low interest rates and asset purchases are beginning to have a positive impact on economic fundamentals, the latest reading of aggregate Euro Area consumer prices rose to a three year high.
According to Eurostat, headline consumer prices rose by 1.10% year over year through the end of December compared to 0.60% a month prior. Besides marking the fastest pace of price growth in years, the figure suggests that the impact of weaker energy prices is finally passing, paving the way for tremendous upside in prices over the coming months.
This figure follows the highly positive reading of German CPI announced on Tuesday which showed annualized inflation more than doubling month over month thanks to rising food prices and higher rents. The gains in the aggregate figure displayed many of the same drivers, with energy prices rising 2.50% over the period, followed by services and food prices climbing by 1.20% apiece.
While still well short of the 2.00% inflation targeted by the European Central Bank, the most recent uptick is a strong indication that the extraordinary monetary policy measures undertaken by the Central Bank are being felt across the Euro Area economy.
The only major obstacle besides inflation to removing accommodation and tapering asset purchases further is unemployment which remains elevated across the Euro Area compared to other advanced economies. Although the jobless rate fell in October to 9.80%, marking the lowest rate of unemployment since July of 2009, it still is well above targeted levels.
With accommodation unlikely to be removed near-term despite the more upbeat inflation reading, the Euro remains under serious pressure. In spite of EURUSD rising off of the lowest levels since 2003, the pair has given back some gains since the inflation announcement, with a retest of 1.0400 likely should the US dollar continue its momentum higher on the back of strengthening economic fundamentals.
ECB Scores Another Victory
Market Trends - 04/01/2017