FX.co ★ Stable inflation at a local high in Germany and Eurozone will lead to an earlier increase in ECB rates

Germany's inflation data released on Monday showed that hopes that it started to slow down at the beginning of the new year turned out to be empty.

Based on the presented data, the consumer price index in annual terms remained at a downward revised level of 4.9%, although it was expected to decline more to 4.3%. In monthly terms, January's consumer inflation showed growth to a downward revised December value of 0.4% instead of the expected fall of 0.3%.

In fact, the data presented showed that the expected slowdown of German inflation is not observed. It continues to hold at the levels of the early 90s of the last century. Such a situation may force the Bundesbank to become active and put pressure on the ECB that it has started raising interest rates earlier.

The market's focus now will be the publication of inflation data in the euro area tomorrow. Some downward correction of inflationary pressure is expected here, but assessing the published values of this indicator in Germany, it is very likely that they will also maintain at least the previous growth rates.

How can all this affect the euro and the local stock market?

First, let's pay attention to the yields of government bonds, primarily German ones. Following the release of inflation data in Germany, the yield of 10-year government bonds, as well as interest-sensitive 2-year bonds, sharply increased. This indicates that the expectation of an early rise in the cost of ECB borrowings has grown markedly. There is no doubt that the euro will not remain indifferent in this situation. It will at least restrain its decline against the US dollar, and it can get local support as a high. But again, a lot will depend on the timing of the start of rate hikes by the European regulator.

The stock market in the euro area can definitely react to the promising strong growth in the yield of government bonds in the region with the start of sales, which will result in a decline in stock indices.

These are the possible prospects while the European stock market will follow the American one, where there has been a pullback after a deep correction amid the prospects for an early increase in interest rates.

Forecast for the day:

The USD/JPY pair is trading at the level of 115.00, below which the price could drop to 113.80.

The USD/CAD pair is trading below the level of 1.2730. The pair is expected to further decline to 1.2630.