Euro Weakens As German Inflation Turns Negative

02/02/2015 9:00 am EST

Focus: FOREX

In this article, James Hyerczyk, at FXEmpire.com, discusses the forex and other market ramifications of last week’s report out of Germany that stated that inflation turned negative for the first time since September 2009 and what it could mean moving forward.

The EUR/USD traded sideways-to-lower on Friday after Germany reported that inflation turned negative in January for the first time since September 2009. Its economy fell 0.5% from a year earlier. Economists had called for a decline of 0.2%.

Traders and economists are looking for inflation to continue to drift lower until at least June when the European Central Bank’s massive 1.1 trillion euro ($1.2 trillion) stimulus package may start to show results.

In other news affecting the euro, the CPI Flash Estimate for the EuroZone posted a reading of -0.6% versus an estimate of -0.5%. Spanish Flash CPI and Flash GDP showed slight improvements versus the estimates.

The stronger dollar helped drive the British pound lower. Net Lending to Individuals came out at 2.2 billion versus an estimate of 3.2 billion. Mortgage Approvals met the estimate at 60K.

The GDP/USD is expected to trade sideways to lower over the near-term over concerns about UK inflation. The Bank of England has already warned that inflation could be below 1%.

April Comex Gold futures are recovering after last Thursday’s more than 2% decline. Sell stops may have triggered the sharp intraday break, but they were triggered by intense selling pressure that had been building for several days. Wednesday’s release of the latest Fed monetary policy statement may have been the final blow for the long investors, since it signaled to investors that the central bank was still on track to lift US interest rates this year. 

The Fed’s use of phrases such as the US economy was expanding “at a solid pace” and to be “patient” may have suggested to gold investors that a rate hike may be coming as early as June.

Gold investors may be disappointed by last Thursday’s break, but “what the central bank giveth, it also taketh away.” Remember that two weeks ago, the Swiss National Bank triggered this recent price surge when it slashed its benchmark rate to negative 0.75%. This time, it was the Fed’s signaling of a rate hike as early as June that fueled its rapid decline. Simply stated, it’s all about chasing yields. Gold doesn’t pay a dividend, so long traders wanted it because 0% is better than -0.75%. If the Fed is going to begin raising rates then Treasurys will offer a much better return than holding onto gold.

Just remember to keep this stored in your databank, “gold investors like negative rates and they don’t like interest rate cuts.” Also, remember that with small investors, being long gold means being 100% in. The central banks, funds, and large investors who own gold aren’t necessarily liquidating their whole position, but merely making position adjustments. Therefore, despite the current weakness, there may still be those holding long positions in gold.

March Crude Oil futures are following through to the upside after reaching a multi-year low earlier in the week. Despite the current selloff, the price slide has had the same momentum that it had during December and early January. Some analysts believe that contango pricing is helping to slow down the rate of descent. Traders are buying nearby crude oil, storing it, and selling it higher in the future.

In US news, fourth-quarter GDP came out at 2.6%, falling short of 3.0% estimates. During the third-quarter, the US economy grew at a rate of 5.0%. Chicago PMI beat the 57.7 estimate with a reading of 59.4. Revised University of Michigan Consumer Sentiment fell slightly below the previous month and the estimate with a reading of 98.1.

By James Hyerczyk, Analyst, FXEmpire.com

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