The EUR/USD Tumbles Toward Support Despite Strong German Data

The EUR/USD tumbled toward support levels near the 1.0325 December lows despite stronger than expected German data. Yields in Europe surged higher but the move did not outpace the climb seen in the U.S. which saw the 10-yield push to fresh highs. A break of the 1.03 level on the EUR/USD, would likely lead to a test of par, which is the lowest level seen since 1999. Stronger German inflation figures and solid employment will continue to put the ECB in a tight spot as German outperforms the rest of Europe.

German HICP jumped to 1.7% year over year, the highest rate since 2013, and starting to eye the 2% limit for price stability. That the headline rate would jump higher at the end of the year on base effects was widely expected, but the number did still come in far above the median forecast and the preliminary breakdown confirmed that most of it was due to energy price increases, which turned to 2.5% year over year in December, from -2.7% year over year in November.

Food price inflation increased to 2.5% year over year from 1.2% year over year and services price inflation lifted to 1.5% from 1.1%. So, the rise is not just due to higher energy prices and will add weight to warnings from Bundesbank President Weidmann that ECB rates are too low for Germany. And indeed, the higher than expected German HICP rate, following the jump in the Spanish number last Friday and the uptick in the French reading this morning suggests that the EMU number, will also come in higher than anticipated.

German jobless numbers dropped -17k in December, much more than anticipated and with the November decline also revised to -6k from -5k, which confirms that the improvement on the labor market continued at the end of 2016. The jobless rate remained at a record low of 6.0%, with much of the remaining gap due to structural issues and a mismatch of skills on the demand and supply side, which highlights the need for structural reforms and changes to the education system even as the numbers look good. With headline inflation picking up as base effects fall out of the equation wage demands are also set to rise this year, which leaves German inflation subject to upside risks going ahead.

FOMC Minutes to the December 13-14 policy meeting are less important given the Fed’s announcement in December that they are predicting 75 basis points of interest rate increases in 2017, and Yellen hawkish stance likely confirms this outcome. There’s little the minutes can show that are not baked into the markets but traders will be highly attuned to any further hawkish references. Fedspeak resurfaces Friday, with the Chicago Fed’s Evans, now one of the most dovish on the Committee, and a voter in 2017, discussing policy and the economy.

Traders will turn their focus to the U.S. employment report for December which is schedule in the first week of January, and can be viewed on the financial calendar. Expectations are for a 190K rise, but any number above 200K will likely push the dollar toward par on the EUR/USD.