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German CPI on Deck

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German CPI on Deck

German data will take centre stage Friday when the Federal Statistics Office reports on consumer inflation. The reading is expected to show German inflation edged up slightly in June following a fresh multi-year low.

Germany’s annual inflation rate fell to 0.9 percent in May, down from 1.3 percent the prior month, the Federal Statistics Office reported last month. That was the lowest rate of inflation in four years.

Month-on-month, inflation in Europe’s largest economy declined 0.1 percent.

Using a method harmonized by the European Union, German inflation tumbled to 0.6 percent in May, down from 1.1 percent the prior month.

The rate of inflation in the broader Eurozone fell from 0.7 percent to 0.5 percent in May, prompting the European Central Bank to slash interest rates even further and introduce a negative deposit rate.

The ECB cut its benchmark lending rate from 0.25 percent to 0.15 percent at the June policy meetings, and set the deposit rate to -0.1 percent.

The annual rate of inflation for Germany is forecast to climb to 1 percent in June. Month-on month, consumer prices are forecast to advance 0.2 percent.

In EU-harmonized terms, German consumer prices are forecast to climb 0.7 percent year-on-year.

The fear of deflation has gripped the Eurozone since October, when inflation first fell below 1 percent. The ECB, which targets inflation at just below 2 percent, cut its lending rate in half at the November policy meeting. A slight increase in German inflation is unlikely to deter the ECB from its current objective. The ECB hinted earlier this month interest rates could remain near zero for a prolonged period.

Deflation is a large inhibitor of economic growth, and can trigger a cycle of declining consumer spending. ECB President Mario Draghi has described below 1 percent inflation as a “danger zone” that could further dampen economic progress in the Eurozone.

The Eurozone economy expanded just 0.2 percent in the first quarter, weighed down by disappointing readings from France and Italy, the currency region’s second and third largest economies respectively.

Year-on-year, Eurozone GDP expanded at a rate of 0.9 percent.

Germany, by contrast, accelerated 0.8 percent in the first three months of the year, double the rate of the previous quarter. Year-on-year, German’s GDP advanced 2.5 percent.

Industry data courtesy of Markit Group suggests the Eurozone economy is on pace to grow 0.4 percent in the second quarter. The German economy is forecast to grow 0.7 percent between April and June.

On Friday the European Commission will produce several batches of economic indicators, including consumer confidence and economic sentiment.

In currency news, the EURUSD edged lower Thursday, declining 0.15 percent to 1.3607. The pair faces support at 1.4602 and resistance at 1.3654.

The EURGBP declined 0.4 percent to 0.7993 after the Bank of England announced plan to rein in mortgage lending. The pair is testing initial support at 0.7994. Initial resistance is likely found at 0.8038.

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