Euro area inflation unexpectedly slows

Price pressures in the Euro area increased by less than expected in the month of August providing more reason for the ECB to proceed with caution as they look to reign in their expansionary monetary policy. The Euro remains little changed on the day and while the pound and US dollar seem to be fairly sensitive to inflation figures the single currency has shown next to no reaction to this release, as it was already lower on the day and around these levels prior to the announcement.

 

ECB in no rush to tighten

The CPI flash estimate dropped to +2.0% Y/Y from the +2.1% seen previously, with most expecting this metric to come in inline with last month’s. While this has fallen it still remains around the central bank’s mandate of 2.0%, but if volatile components such as energy are stripped out to arrive at a “core” reading, then the increase was only 1.0% - down from 1.1% in July. Since posting its best year of growth in a decade in 2017, the economy has slowed a little with uncertainty rising and the potential for trade disruptions increasing markedly - Trump reportedly rejected an EU proposal to scrap levies on cars just last night. What this means overall is that while the ECB will still likely end their QE programme later this year, they are still some way off moving rates out of negative territory and with the core inflation data in particular remaining some way below their threshold it appears unlikely they will be in any sort of rush to tighten faster than is presently expected.

 

Turkey raise taxes in attempt to defend Lira

There’s been an attempted recovery in the Turkish Lira this morning after the government raised taxes on dollar deposits of up to a year and scrapped a 10% tax on Lira accounts with maturities over 1 year. The move is clearly aimed at making the US dollar relatively less attractive in the short term while encouraging longer term holdings of the Lira, but while there’s been initial gains this is unlikely to be enough to stem the overall declines. Emerging markets came back to the fore of traders minds yesterday as several currencies were hit with a wave of selling and despite the Argentine central bank hiking rates by 15% to a global high of 60%, the Peso was the biggest loser. There remains a feeling that all is not well in these markets and the question now really becomes whether currency crises in Ankara and Buenos Aires can be contained or whether there’s a spillover effect and contagion risks rise once more.