The release of German inflation data sparked a fall in the euro in the first European trading session of 2023.

The euro had strengthened quite rapidly throughout the end of last year. However, the release of German inflation data triggered a drop in the Single Currency in the first European trading session of 2023. EUR/USD slumped more than 1 percent to a low of 1.0510s in trading on Tuesday (3/January), while EUR/GBP fell more than 0.7 percent to 0.8780s.

german inflation

The preliminary report from the German Federal Statistics Office stated that the consumer inflation rate weakened in December 2022. CPI inflation was recorded at -0.8% (Month-over-Month), much weaker than market estimates of -0.3% and the previous period's decline of -0.3%. -0.5%. As a result, Germany's inflation rate was dragged down from 10.0% to 8.6% annually.

If Germany's inflation rate reflects regional inflation trends, the European Central Bank (ECB) is in danger of failing to realize its plan to be more hawkish in 2023. It was these hawkish expectations that had hoisted the euro exchange rate at the end of last year.

Bundesbank President Joachim Nagel has previously said that he believes German inflation weakened in December thanks to curbs on gas and electricity prices. However, market analysts and other ECB officials indicated that Eurozone inflation remained rising and needed further rate hikes to control it.

Market participants will wait for the next batch of economic data to assess whether the ECB can maintain its hawkish resolve. Some highlights include French inflation reports on Wednesday, Italian inflation on Thursday, and preliminary estimates for overall Eurozone inflation on Friday. Other data will still attract market attention ahead of the ECB's policy meeting in early February.

"With the German CPI premiere (Jan 3), Eurozone PPI (Jan 5), Eurozone CPI premiere (Jan 6), Sentix (Jan 9), German ZEW (Jan 17), and PPI (Jan 20), as well as several PMI premiere (24 Jan), a lot of data to scrutinize," said Jordan Rochester of Nomura, in a year-end note, "The main issue is whether Eurozone CPI inflation slows quickly; or whether good news from the government's fiscal package, lower prices gas, and/or hopes of China's reopening point to a sustained rebound in European growth data."