Home Daily Commentaries European Inflation hits lowest point since 2021

European Inflation hits lowest point since 2021

Conor Fleming
Written by
Conor Fleming

Conor Fleming

OFXpert

With 30 years of experience in the foreign exchange world, Conor spearheads initiatives to encourage businesses in Germany, Switzerland, and Austria to hedge their foreign currency risks with OFX.

| Wednesday 2 October, 2024

Daily Currency Update

In Germany, inflation data published yesterday showed a rate of 1.8%, the lowest level since 2021. Inflation is also easing in France, Italy, and Spain. Markets have now fully priced in a 25 basis point cut in borrowing costs in Europe. Rate cuts are all but certain after ECB President Christine Lagarde said this trend will be fully taken into account when the Governing Council meets later in October.

The Pound weakened yesterday following a slowdown in factory orders in September. The manufacturers’ purchasing managers index also fell to 51.5 in September, below market expectations. Markets are expressing trepidation while waiting for the new Labour budget on October 30th. The Bank of England is fully expected to cut rates by 25 basis points next month, with no more cuts expected before year-end.

Fed Chair Jerome Powell gave markets a moment of pause when he said that the Federal Reserve’s base case is for 50 basis points of cuts between now and year-end. He added that the Central Bank will reach their neutral rate “over time.” Markets have now fully pared back expectations for a 50 basis point cut at the Fed’s next meeting, and we have seen the US Dollar rally over 1% on the back of this revaluation of borrowing costs.

Key Movers

The notion that the ECB will reduce borrowing costs in Europe slower than in the US is crumbling fast, with interest rate differentials now pointing toward a softer Euro. Worryingly, France’s new Prime Minister, Michel Barnier, said their economy is facing an even worse fiscal deficit and likely a political revolt if he attempts to push forward some budget consolidation measures. French bond yields continue to widen compared to their German counterparts.

Bank of England MPC external policy member, Megan Greene, said Tuesday that inflation could rise again in Q4 due to a sharp increase in consumption. Greene added that recent dips in inflation were because of a short-term dip in oil prices and that inflation in the services sector, recently published at 5.6%, was worrisome. However, she added that over time, prices will normalize toward the Bank of England’s target level of 2%.

Overshadowing economic data, the US Dollar has benefitted from “safe haven flows” in the last 24 hours as tensions in the Middle East have ratcheted up. The US Dollar has been soft of late as markets expected deep interest rate cuts by the Fed running into year-end, but Fed Chair Jerome Powell poured water on those expectations overnight. Combined with geopolitical tensions, it is possible the US Dollar may strengthen over the short term.

Expected Ranges

  • GBP/USD: 1.3245 - 1.3300 ▼
  • GBP/EUR: 1.1975 - 1.2015 ▼
  • GBP/AUD: 1.9250 - 1.9300 ▼
  • EUR/USD: 1.1040 - 1.1090 ▼

Written by

Conor Fleming

OFXpert

With 30 years of experience in the foreign exchange world, Conor first embarked on his financial career journey as a trainee dealer in BNP Paribas in the early 90s. His professional journey also took him to New York, where he assumed the role of Head of Sales with an Irish bank for a few years. During his tenure at both banks, he was invited to several interviews on Irish television to discuss market turbulence, the factors driving volatility and insights into what could be expected as events unfolded.

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