German annual CPI inflation rises to 2.4% in September vs. 2.3% expected

Sagar Dua FXStreet

Annual inflation in Germany, as measured by the change in the Consumer Price Index (CPI), rose to 2.4% (flash estimate) in September from 2.2% in August. This reading came in above the market expectation of 2.3%. On a monthly basis, the CPI rose by 0.2% following the 0.1% increase recorded in August.

Meanwhile, the Harmonized Index of Consumer Prices, the European Central Bank's (ECB) preferred gauge of inflation, rose 0.2% on a monthly basis, lifting the annual rate to 2.4% from 2.1%.

Market reaction to German CPI data

EUR/USD showed no immediate reaction to these figures and was last seen trading marginally higher on the day at 1.1740.

This section below was published as a preview of the German Consumer Price Index (CPI) data.

Flash German HICP data Overview

The preliminary German Harmonized Index of Consumer Prices (HICP) data for September is due for release today at 12:00 GMT. The Federal Statistics Office of Germany is expected to show that inflationary pressures in the economy rose at an annual pace of 2.2%, faster than 2.1% in August. On a monthly basis, price pressures are expected to have grown steadily by 0.1%.

Earlier in the day, the inflation data from six states of Germany showed that price pressures grew at a faster pace in five out of six regions on an annualized basis, except in Saxony where yearly Consumer Price Index (CPI) data rose at a steady pace of 2.2%.

The impact of the preliminary German HICP data for September will be significant on market expectations for the European Central Bank’s (ECB) monetary policy outlook, given that the German economy is the largest nation of the Eurozone in terms of population and trade.

On Wednesday, the Eurostat will publish the preliminary Eurozone HICP data for September.

How could the flash German HICP data affect EUR/USD?

EUR/USD extends its winning streak for the third trading day on Tuesday. The major currency pair trades 0.2% higher to near 1.17650 during the European trading session.

The 20-day Exponential Moving Average (EMA) flattens around 1.1735, suggesting that the near-term trend is sideways.

The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, indicating indecisiveness among investors.

Looking up, EUR/USD pair could rise towards the psychological level of 1.2000 if it will break above the four-year high around 1.1920. On the downside, the September low around 1.1600 will be key support zone for the pair in case the pair slides below the September 12 low of 1.1700.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

Author

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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