As we approach the end of June, it’s time for the Eurozone inflation report to be released again (Friday, 09:00 Japan time). Despite the recent easing of inflationary pressures, CPI announcements continue to have a significant impact on market dynamics. The euro has had a mixed month, but this week’s strong data set could help it recover some of its recent losses against the pound.
Where are we now?
The European Central Bank has followed a path of restraint in monetary policy over the past 11 months, raising interest rates at every meeting, with its final interest rate decision announced at its meeting on June 15. At the last press conference, Lagarde made it clear that the ECB is determined to keep raising rates unabated by recent inflation data and weak survey data.
An overwhelming majority of ECB members take July’s rate hike for granted. Employment continues to tighten to record levels, especially amid high core inflation, and neighboring central bank the Bank of England has decided to step up its tightening strategy. The focus has shifted to September, a somewhat premature reaction given that the meeting is three months away.
However, the market is very interested in comments on the inflation outlook for the second half of 2023. The annual ECB forum on central banking is currently taking place in Sintra, Portugal, and the entire ECB Governing Council, including Lagarde, will make the following statements: likely to appear and provide insight into the inflation outlook.
More directly, repeated weak results in various business surveys, notably the recent German PMI data and German IFO survey, raised eyebrows in the hallways of the Deutsche Bundesbank and energized ECB doves. must. Therefore, we expect these pigeons to emphasize the need for self-restraint. Their attempt to influence the outcome of the July meeting is likely to be doomed unless inflation this week creates a big downside surprise.
June’s CPI will be the big announcement of the week
Preliminary data from Germany will be released on Thursday, followed by the Eurozone tally the following day. Markets expect German headline inflation to pick up slightly year-on-year, but Eurozone headline inflation is expected to fall to 5.6% y/y, the lowest since March 2022. . More interestingly, the Eurozone core sub-index accelerated to 5.5% y/y. Economists have long opposed the core CPI’s perceived ability to predict future key figures, yet core CPI remains high and inflation is likely It increases the risk of becoming entrenched in the perception of
If these predictions are confirmed, the market reaction will likely be muted. What’s more interesting is that while a weaker result wouldn’t sway markets too much, it would certainly raise questions about the outcome of the September meeting. With a sharp market reaction, the ECB could get two more CPI reports by September to see if inflation is really in a downward spiral, so perhaps skeptical. would receive Conversely, a set of strong data is unlikely to change ECB expectations dramatically, but it will certainly impact the euro, especially against the pound.
Euro struggles against pound
The currency pair has received a lot of attention as the pound has shown unexpected strength recently despite the Bank of England being far behind on rate hikes. The recent 50bps rate change decision could further support sterling if it can stick to policy and avoid a return to the psychology that saw inflation hover above 8% for 14 consecutive months.
Strictly speaking, this situation is not overly supportive of the pound. The recent drop failed to test the critical 0.8504 level and is currently trading near the December 2022 lows. The pound bulls may be taking a breather after a good run, but they should brace themselves as the momentum indicator flashes red. The stochastic oscillator has broken out of the oversold territory, sending a strong bullish message. EUR/GBP could rise towards the key area 0.8670-08720 if inflation data confirms the ECB’s more hawkish outlook.
On the other hand, weak inflation data and concerns about lingering growth prospects could give the EUR/GBP a much-needed boost to new 2023 lows. A successful breakout of the Feb 24, 2012 high of 0.8504 could turn the euro bears’ eyes lower to the 0.8400 area.