Sell EURUSD due to expectations of low inflation in Germany

German inflation has dropped to its lowest level for two years. Consumer prices rose by 4.3% compared to the same period last year (6.4%), the German statistical office reported on Thursday.

While that’s the slowest pace, it remains more than double the European Central Bank’s 2% goal for the 20-nation eurozone. Prices rose 0.2% on the month.

The data from Europe’s largest economy reinforces expectations for the ECB to stop raising interest rates following an unprecedented 10 straight hikes. That doesn’t mean a cut is imminent: officials say they’ll keep borrowing costs at restrictive levels for a prolonged period to get price gains back to the target.

Money markets are wagering on two quarter-point rate reductions by end-2024. It weakens the EURUSD pair.

There are also downside risks as the region's economy deteriorates. According to new forecasts by five institutes that advise the government, German output will shrink by 0.6% this year.

The institutes see this year’s 6.1% inflation reading easing to 2.6% in 2024 and 1.9% in 2025.

At the same time, in the US, new market data suggests that large short positioning in Fed funds futures means a bet on a higher Fed rate in November.

Thursday’s CME Group Inc. preliminary open-interest data, which gives an indication of new futures positions, showed a hefty jump in November fed funds futures in the prior day’s trading.

The increase of about 70,000 contracts was consistent with new short positioning, meaning a bet on a higher Fed rate. On the day, a record 238,000 traded in the November contract, surpassing the 233,000 seen Sept. 21, the day after the Fed’s policy announcement last month. It also contributes to the weakening of the EURUSD pair.

The burst of trading activity around the November meeting comes as rates markets overall are moving to price in the Fed’s message that it intends to keep borrowing costs higher for longer to tame inflation. Yields on longer-term Treasuries surged to multi-year highs on Thursday. In its meeting last month, the central bank penciled in one more hike this year.

The final recommendation is to sell EURUSD and fix profit or loss in a month.