Euro to take a hit from US-Greenland issues as ECB rate hikes 'further off' than expected

The Euro traded around its mid-December lows yesterday versus the broadly stronger Dollar. Euro Area inflation figures released earlier in the week suggested that higher ECB rates are perhaps further off than market participants had originally anticipated.

The main rate of inflation fell (as expected) to the ECB’s 2% target last month, while the core rate unexpectedly dropped to 2.3% (from 2.4%). Undoubtedly the biggest surprise came from Germany, as inflation in the bloc’s largest economy slumped to 2% in December - a seriously rapid cooling from the 2.6% in November.

This doesn’t exactly rule out ECB hikes in the not too distant future, but markets now clearly favour no change through the rest of the year. With no major data out of the common bloc today, expect the euro to take its cue from today’s US NFP report.

We think that geopolitics could have a more meaningful bearing on the euro in the near-term.

The ongoing headlines surrounding US interference in Greenland should be bearish for the common currency given: a) it could jeopardise the US-EU trade deal, and b) EU member bloc budget’s could be strained if they increase aid, not to mention the euro tends to react poorly to rising geopolitical premiums globally.