European Central Bank governing council member and Bundesbank head Jens Weidmann said on Wednesday that upside risks to inflation dominate in both Germany and the rest of the Eurozone. The flexibility of the PEPP should not be transferred to any other bond-buying programme, Weidmann continued, adding that the ECB should not lock in ultra-easy policy settings for long given elevated inflation uncertainty.
On inflation, Weidmann warned that inflation will peak near 6.0% in Germany and only fall back below 3.0% at the end of next year. Weidmann said that Germany's 2021 growth is likely to be significantly lower than the Bundesbank June forecast, with the recovery instead pushed further out. Companies' complaints about labour shortages have increased particularly in Germany, but also among its European neighbours, he added. In the future, he continued, tensions in the labour market could make it easier for employees and trade unions to push for noticeably higher wages.
Market Reaction
Weidmann is a known hawk and his comments have, thus, unsurprisingly failed to give from session lows under 1.1200. EUR/USD has been weighed heavily on Wednesday by a combination of factors. Firstly, there was speculation during the European morning that Germany would soon announce a full lockdown and vaccine mandate and the infection/hospitalisation statistics across the continent continue to worsen. More recent reports suggest the new German government coalition, which formally announced itself on Wednesday, won't heed former Chancellor Angela Merkel's call for an immediate move to lockdown.
The tone of Wednesday's November German IFO report also did little to inspire confidence in the euro. The Ifo Institute forecasts a stagnation in growth in Q4, chiming with the above comments made by Weidmann, while ING, reacting to the data, warned that "the risk of stagnation or even recession in the German economy at the turn of the year has clearly increased".
Meanwhile, the market's broad bid for safe-haven assets has helped boost the dollar, whilst strong US data (initial weekly jobless claims fell under 200K for the first time since before the pandemic and Core PCE rose to 4.1%) and hawkish Fed commentary has also helped add to the bid.
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