Germany PPI continues sharp decline; Upcoming Fed Minutes to influence EURUSD

The newly released producer price index (PPI) data for Germany, Europe’s largest economy, showed a decline of 11.0% YoY for the month of October 2023.

This was in line with forecasts published by Investing.com, marking an improvement from last month’s collapse to (-)14.7% YoY.

This suggests that the downstream demand environment may be improving.

The latest data marks the fourth consecutive month of declining producer prices, after having slipped to (-)6% YoY in July 2023, and deteriorated further to (-)12.6% YoY and (-)14.7% YoY over the next two months.

Data for September 2023 released last month marked the sharpest decline for German PPI since the series commenced in 1949, primarily due to an incredibly skewed base effect following the historic highs of 45.8% YoY registered in both August and September 2022.

The primary reason for the improvement in the producer prices was the reduction in energy prices, declining (-) 27.9% YoY since October 2022, with electricity leading the way with a sharp fall of (-) 36.2% YoY in comparison to the muted (-)1.4% change in September 2023.

Prices of intermediate goods fell (-)4.6% YoY led by the decline in metals and chemical raw materials which were down (-)11.7% YoY and (-)12.1% YoY, respectively.

In addition, wood was cheaper by (-)17.9% YoY on an annual basis.

In contrast, ready-mixed concrete, lime and burnt plaster, and hollow glass were up by 24.7% YoY, 22.0% YoY, and 17.5% YoY, respectively.

Consumer goods were also up by 3.9% YoY and led higher by the increase in costs of food which saw a rise of 3.7% YoY compared to the same month in the previous year.

Processed potatoes increased by 29.4% YoY, while fruit and vegetable products were up by 16.0% YoY.

Durable goods saw producer prices increase by 4.2% YoY, significantly higher than the 0.2% YoY increase registered in September 2023.

Capital goods also increased by 4.4% YoY driven by higher prices in machines of 5.4% YoY, as well as a 3.9% YoY increase in motor vehicles and motor vehicle parts compared to October 2022.

Monthly inflation

On a monthly basis, producer prices improved to (-)0.1%, coming in line with market expectations, following the unexpectedly sharp decline to (-)0.2% in September 2023.

As expected, monthly PPI has been much noisier than its annualized counterpart.

As per analysts at TradingEconomics.com, PPI YoY is expected to improve to (-)3.9% YoY at the end of the quarter and improve to 2.5% YoY in 2024.

Such an improvement would support the expectation that demand factors are strengthening.

PPI MoM is expected to register an increase of 0.5% YoY at the end of the quarter.

EURUSD outlook

The euro strengthened by over 2% against the dollar in the previous week, and markets will continue to monitor upcoming German data and European PMIs to gauge the near-term trajectory of the currency pair.

On Thursday this week, French, German, and pan-euro area PMI data shall be released.

An optimistic appraisal will likely strengthen the euro.

However, unfavourable responses among managers of private enterprises could lead the European Central Bank (ECB) to follow a more dovish approach, leading to weaker support for the euro.

As the third largest economy in the world, investors shall also closely watch the German GDP release for the third quarter on Friday this week.

Analysts at Investing.com project a decline of (-)0.3% YoY.

If the data underperforms, this would drive down near-term demand for the euro.

FOMC minutes

Tomorrow, i.e., 21^st November 2023, the Federal Open Market Committee (FOMC) shall release its most recent Minutes of the Meeting.

Following soft inflation data which showed the CPI slowing to 3.2% YoY in last week’s release, markets are anticipating a rate cut in 2024.

As per CME’s FedWatch Tool, there is currently only a 36.9% probability of the status quo being maintained at 5.25%-5.50% in the May 2024 meeting.

The data also suggests a 48.9% chance of a rate cut to 5.0% – 5.25%, and a 14.2% chance of a decline to 4.75%-5.0% during the meeting.

However, an unexpectedly hawkish narrative in the minutes released by the Federal Reserve tomorrow may further demand for the dollar, consequently weakening the euro’s recent momentum in the EURUSD pair.

In addition, on Thursday, November 24^th, markets will closely watch the US PMI data to assess the strength of the economy, the likelihood of a May 2024 rate cut, and whether a soft landing will remain achievable.

Although the dollar is facing challenges at home and away, it continues to be the leading reserve currency in the world.

In terms of its impact on the currency pair, the FOMC minutes are likely to overshadow the ECB’s policy minutes, which are also due later this week.

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