The euro held a firm footing on Tuesday after inflation in the eurozone rose at a faster pace than expected in November.
The single currency gained 0.7% against the dollar and was up 0.4% against the pound after data from Eurostat showed headline annual inflation rose to 4.9% in November, up from 4.1% in October. A year earlier, the rate had been just 0.3%.
Reflecting the global inflationary trend the highest contribution to November’s rise was energy prices, which jumped by 27.4%, following a 23.7% leap in the previous month. Services rose at 2.7% in November following a 2.1% increase in October.
Headline inflation has now been above the European Central Bank’s 2% target rate since July and analysts expect the rate to remain elevated beyond this target through next year.
“The big picture is that price pressures remain intense, with producer price inflation strong and firms’ selling price expectations extremely high,” said Jack Allen-Reynolds, senior Europe economist at Capital Economics.
However, the ECB will feel under less pressure to raise interest rates in the medium term given the uncertainties over the course of the global pandemic.
With the new Omicron variant now a major concern and with Europe dealing with a fourth wave of infections, the likelihood of further disruptive restrictions on international travel and domestic activity has risen – with Austria already imposing lockdown restrictions and Germany among those considering tighter measures.
Such concerns have already driven oil prices sharply lower – Brent crude, the European benchmark oil futures contract, has lost more than 13% in the past three days to hit a three-month low of around $71 a barrel on Tuesday.
“The impact of the Omicron variant on inflation will be mixed,” said Allen-Reynolds. “Lower oil prices will reduce energy inflation, but if the variant exacerbates global demand-supply imbalances, goods inflation could be higher for longer.”
Melanie Debono, senior Europe economist at Pantheon Macroeconomics, added: “Indeed, if anything, the return of the virus increases the risk that the ECB will even decide to shelve the end of PEPP in March, as currently planned.”
The pandemic emergency purchase programme (PEPP) was introduced by the bank in March 2020.
Earlier, the euro had been supported by a fall in the rate of German unemployment, but today’s data appeared unlikely to keep the currency moving higher for long as dovish market positioning shifted net EUR short positions – bets on the euro moving lower – to their highest levels since October.
Jane Foley, senior FX strategist at Rabobank, said: “The risks to growth from the fourth wave of Covid in Europe have been further complicated by the Omicron variant, this is triggering a broad re-evaluation of positioning.”
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