EUR/AUD plummets after the release of lower-than-expected German and Spanish CPI data

EUR/AUD is down by almost three quarters of a percent on Thursday, trading in the 1.6270s, after the release of German and Spanish inflation data revised the outlook for interest rates in the Eurozone as a whole, weakening the Euro (EUR) in the process. 

German preliminary Consumer Price Index (CPI) data fell to 1.9% YoY in August from 2.3% in July, and came in below economists expectations of 2.1%, according to data from Destatis. 

The sharper-than-expected decline in German CPI followed similar data from Spain which showed Spanish CPI in the month of August falling to 2.2% from 2.8% in July, and also coming in well below estimates of 2.4%, according to INE. Data for the region as a whole is scheduled for release on Friday. 

The disinflationary number has increased expectations that the European Central Bank (ECB) will lower interest rates by 0.25% at their September meeting. Such a move would weaken the Euro as lower interest rates attract less inflows of foreign capital. 

At the last ECB meeting, the President of the ECB Christine Lagarde adopted a “wait and see approach” and said future interest rate decisions would be dependent on incoming data. Given the incoming data has been more disinflationary than expected, the market is pricing in a greater chance of the ECB moving to lower rates. 

“With the growth outlook quite soggy, the ECB is widely expected to resume easing in September. 75 bp of total easing by year-end is nearly priced in,” says Dr. Win Thin, Global Head of Markets Strategy at Brown Brothers Harriman (BBH). 

Commentary from ECB officials has fallen short of endorsing a rate cut so far. 

ECB Executive Board Member Philip Lane, said on Thursday, that although wages in the Eurozone were expected to rise in the second half of 2024 they were “peaking now” and likely to lose momentum in 2024-5. 

Earlier in the day, the Governor of the Central Bank of Cyprus, Christodoulos Patsalides said that if the ECB’s projections “continue to materialize, there’s nothing to prevent the Governing Council from reducing interest rates”, adding that “Policymaking is still data-dependent.” 

EUR/AUD is falling because inflation in Australia is higher than in Europe. Australia’s monthly CPI rose 3.5% YoY in July,  and although down from the 3.8% in June it came in above estimates 3.4%, and remains well above the levels for the Eurozone as a whole (2.6% in July). 

Policymakers in Australia are less certain the time is right to reduce interest rates with the Minutes of the Reserve Bank of Australia’s last meeting revealing that members considered raising interest rates to tame inflation before ultimately deciding to hold steady. 

RBA Governor Michelle Bullock also said recently that it was still “premature” to consider cutting rates. She warned that inflation remains “too high” and is not expected to return to the central bank’s 2%-3% target until the end of next year.