Eurozone CPI To Be a Major Driver for the ECB and Euro

Written on 30/08/2023 by Lukman Otunuga, Senior Research Analyst at FXTM

Market Impact: Data and ECB’s Dilemma

Of course, Friday’s US monthly non-farm payrolls report will be a key driver for markets with activity data under the lens after the recent job openings numbers cooled signalling some potential relief for the Fed and rampant US Treasury yields.

A key focus in the eurozone will be the fresh inflation data to be released on Thursday which is likely to show prices fell again in the headline rate. This is due to the big jump in energy prices last August which means base effects will essentially cause the decline. Eurozone inflation has more than halved from last year’s peak of 10.6%.

But policymakers at the ECB will be more concerned with stubbornly high “core” prices that have existed throughout most of 2023. These exclude volatile components like food and energy and are seen inching lower, but all-important services inflation could continue to underpin strength in underlying price pressures. This makes life tricky for the ECB as it wants to see core prices fall sustainably before it can stop its tightening cycle. That said, President Lagarde stated last week at Jackson Hole that she was “pretty confident” inflation data would look significantly different by the end of the year.

Markets will have one eye on the ECB’s rate decision in a few weeks’ time, which is currently on a knife edge. The battle between the hawks and doves appears as tense as usual with the former counselling against a pause in favour of a data dependent hike, if the annual inflation figures fail to fall. In fact, it could be the bank’s last opportunity to raise borrowing costs as eurozone data points to an ongoing slowdown in the region’s economy. Recent PMI data painted a grim picture with services falling to a 30-month low and in contractionary territory. That puts the spotlight on these inflation metrics to move the 50/50 September rate decision dial one way or another.

EUR/USD Decline: USD Strength, Treasury Yields, and Potential Rebound

The EUR/USD decline over the previous month has been mainly driven by overall USD strength and those surging Treasury yields. Yesterday’s rebound in the world’s most traded currency major came off the 200-day simple moving average just above 1.08. The pair is now closing in on the short-term downtrend line marking the decline since mid-July which comes near 1.09. Friday’s US payrolls will have the final say on this week’s overall USD performance. Even so, higher than expected eurozone inflation data might help to put a floor under the euro in the short term.

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