Inflation in Germany is rising, but a peak is near

The final German inflation data continues to underline the divergence with the USA. This gives a chance for a further EURUSD recovery if the ECB has the strength to hike rates longer than the Fed.

The official report today confirmed inflation at 10.4% y/y in October. CPI added 0.9% after jumping by 1.9% a month earlier. Annual price growth continued to break records in Europe, while in the US, it has been slowing steadily since June.

A low base effect (CPI contraction in November 2021) is an argument for a new record for inflation this November. However, the same month could see a peak in inflation for several reasons.

Firstly, a high base effect comes into effect in December, formally restraining year-on-year growth. Second, falling energy prices and the euro stabilisation may also work against inflation. Thirdly, some European sectors are moving from deceleration to contraction, affecting service prices.

However, what matters for EURUSD’s prospects is what tone the ECB takes. Yesterday we saw encouraging signs for the euro that members of the central bank are maintaining their hawkish tone. Now, this supported a speculative attack on the dollar. But it is a long-term factor that creates both impulses and trends. EURUSD may have already passed its bottom, and inflation will soon pass its peak.