"German companies might expect increasing profitability in the future, stepping up with some new hirings. Part of the improvement in the labor market is due to the positive effects of the German structural reforms implemented ahead of the crisis."
- Annalisa Piazza, a fixed-income strategist at Newedge Group
It was expected that the weaker-than-expected German inflation data would have significant bearish impact on the Euro, as weak inflationary pressure will put pressure on the central bank to boost growth. On Thursday, bears pushed the most traded pair significantly lower, with EUR/USD falling back to 1.357 from 1.3658 a day earlier.
According to a report from the Destatis, the cost of living in Europe's largest economy advanced 1.3% in January, from a month earlier when the so-called CPI index rose 1.4%. Analysts, however, expected the indicator to move closer to a threshold of 2%, inching higher 0.1%. On a monthly basis, prices even erased 0.6% over the period, compared with a 0.4% gain in the preceding month. The main downside pressure came from lower energy prices. Harmonised inflation surprised markets to the downside as well.
At the same time, the situation in the labour market improved, as jobless rate held steady at 5.8%, while the number of unemployed people declined by 28,000 to 2.93 million. The latest data suggest the economic growth is picking up. Business sentiment improved, manufacturing activity, probably, expanded for a seventh consecutive month, while situation in the labour market ameliorated significantly. In this case, weak inflationary pressure is likely to be short-lived.
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