EUR/AUD tumbles after the release of weaker-than-expected German and Spanish CPI data

• EUR/AUD falls sharply after German and Spanish inflation data came in lower than expected.
• The weaker inflation data increases the chances that the ECB will cut interest rates in September.
• The RBA continues to refrain from cutting interest rates due to extremely high inflation in Australia.

EUR/AUD fell nearly three-quarters of a percent on Thursday to trade in the 1.6270s after the release of German and Spanish inflation data revised the outlook for interest rates in the eurozone as a whole, weakening the euro (EUR) in the process .

Germany’s preliminary consumer price index (CPI) fell to 1.9% from a year ago in August from 2.3% in July and came in below economists’ expectations of 2.1%, according to Destatis data .

The sharper-than-expected drop in German CPI followed similar data from Spain, which showed Spanish CPI in August fell to 2.2% from 2.8% in July and was also well below estimates of 2.4%, according to INE. Data for the region as a whole is scheduled to be released on Friday.

The disinflationary number raised expectations that the European Central Bank (ECB) will cut interest rates by 0.25% at its September meeting. Such a move would weaken the euro as lower interest rates attract fewer foreign capital inflows.

At the ECB’s last meeting, ECB President Christine Lagarde took a “wait and see” approach and said future interest rate decisions would depend on incoming data. Given that the incoming data was more disinflationary than expected, the market is more likely to see the ECB move to lower rates.

“With the growth outlook quite weak, the ECB is expected to resume easing in September. 75bp of total easing by the end of the year is close to priced in,” says Dr Win Thin, global head of markets strategy at Brown Brothers Harriman (BBH).

Comments from ECB officials have so far fallen short of supporting a rate cut.

Philip Lane, a member of the ECB’s Executive Board, said on Thursday that while euro zone wages are expected to rise in the second half of 2024, they are “peaking now” and are likely to lose momentum in 2024 -2025.

Earlier in the day, Central Bank of Cyprus Governor Christodoulos Patsalides said that if the ECB’s projections “continue to materialize, nothing can prevent the Governing Council from cutting interest rates,” adding that “policymaking is still data-dependent. ”

EUR/AUD is falling as inflation in Australia is higher than in Europe. Australia’s monthly CPI rose 3.5% year-on-year in July and, although down from 3.8% in June, beat estimates of 3.4% and remains well above levels for the eurozone as a whole (2.6% in July).

Australian policymakers are less sure now is the right time to cut interest rates, as minutes from the Reserve Bank of Australia’s latest meeting reveal members considered raising interest rates to tame inflation before deciding eventually to remain constant.

RBA governor Michelle Bullock also recently said it was still “premature” to consider cutting rates. She warned that inflation remains “too high” and is not expected to return to the central bank’s 2%-3% target until the end of next year.