Germany’s annual inflation rate, measured by the Consumer Price Index (CPI), fell to 2.3% in October, down from 2.4% in September, according to the Federal Statistical Office. This number was higher than the expected 2.2%. On a monthly basis, the CPI rose by 0.3%. The Harmonized Index of Consumer Prices (HICP), which the European Central Bank uses, also showed a 0.3% increase monthly and a 2.3% increase yearly. The HICP tracks inflation across European Union countries.

Currency Movement

After the inflation report was released, the EUR/USD exchange rate dropped by 0.45% against the US dollar, trading at 1.1550. This shift illustrates the currency reaction following the news. Although Germany’s inflation is easing, it came in a little higher than expected at 2.3%. This is better than the 2.4% in September, but the market hoped for a more significant drop to 2.2%. The persistence of this inflation indicates that reaching the central bank’s target is challenging. This unexpected figure makes the outlook for the European Central Bank (ECB) more complex. We now need to reconsider when and how quickly any potential interest rate cuts will happen in 2026. This data suggests that the ECB might have to keep rates steady for a longer time than we thought. Looking back, we have made progress from the nearly 11% inflation highs in late 2022. However, recent Eurostat data indicates that services inflation is still a big issue, holding steady at about 3.8% across the Eurozone. This is mainly due to ongoing wage growth, a concern the ECB has highlighted. The resistance in this crucial area of the economy suggests that overall inflation will decline slowly.

Foreign Exchange and Interest Rate Markets

For foreign exchange traders, the euro’s decline to 1.1550 against the dollar is significant. The market appears more concerned about persistent inflation affecting economic growth than about the ECB maintaining high rates. It may be wise to consider buying EUR/USD put options to safeguard against further declines in the currency over the coming weeks. In the interest rate markets, this serves as a strong signal to reassess future rate trends. We see an opportunity in selling Euribor futures contracts for the second half of 2026. This move could yield profits if, as this data implies, the market needs to adjust its overly optimistic rate cut expectations. This outlook is also unfavorable for German stocks, as higher borrowing costs for an extended period will impact corporate profit margins. We witnessed the DAX index face significant challenges during the 2022-2023 rate hike cycle under similar circumstances. Buying put options on the DAX could be a reasonable hedge against a potential market drop. Create your live VT Markets account and start trading now.

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