Germany’s preliminary inflation data from Destatis showed that the Consumer Price Index (CPI) rose by 0.1% in January compared to the previous month. This is higher than the expectation of no change and follows a prior reading of 0.0%. Year-over-year, the CPI increased by 2.1%, slightly below the 2.2% forecast but up from last month’s 1.8%. The Harmonised Index of Consumer Prices (HICP) reported a 0.1% decrease month-on-month, which is better than the expected -0.2% and lower than the previous 0.2%. Annually, the HICP rose to 2.1%, just surpassing the forecast and last month’s 2.0%.

Impact On The Euro

This data had little impact on the Euro, with EUR/USD declining against a stronger US Dollar. Currently, EUR/USD is at 1.1917, down about 0.40%. Germany’s economy has a significant influence on the Euro as it is the largest economy in the Eurozone. German Bunds are regarded as a safe investment in Europe. The Bundesbank, Germany’s central bank, focuses on price stability, which impacts the European Central Bank’s (ECB) policies. Looking back at the mixed inflation data from early 2025, annual inflation was around a manageable 2.1%. However, today’s Eurostat flash estimate for January 2026 shows headline inflation at 2.8%, with stubborn core inflation still above 3%. This shift from the ECB’s target is crucial for derivatives positioning. Persistent core inflation suggests that the ECB may have to delay any expected interest rate cuts. Therefore, selling front-end interest rate futures, such as those linked to Euribor, could be a smart strategy for anticipating a “higher-for-longer” stance on monetary policy. The market’s current expectations for rate cuts later this year may be overly optimistic.

Currency Sensitivity And Strategies

The uncertainty about the ECB’s actions creates volatility, which can be leveraged using options. Similar to how the 2025 data caused indecision, we expect sharp movements around future ECB meetings and inflation reports. Buying straddles or strangles on volatility-sensitive assets, like the Euro Stoxx 50 index, could be an effective way to profit from these price fluctuations. The landscape for German government bonds has changed dramatically since the days of negative yields in 2025. With the 10-year Bund yield now providing a positive return of about 2.4%, new opportunities have emerged. We see potential in yield curve trades, anticipating that the ECB will keep short-term rates steady while longer-term growth expectations soften. While the Euro’s response to older data was muted, it is currently very sensitive to interest rate differences, especially against the US dollar. With EUR/USD around 1.0750, any data that confirms ECB hawkishness could temporarily support the currency. Traders using derivatives should watch for indications that the ECB may lag behind the Federal Reserve in any easing cycle. Create your live VT Markets account and start trading now.

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