Eurozone CPI & GDP data to test euro’s freefall – Forex News Preview
July 28, 2023 3:29 pm
Eurozone preliminary CPI inflation figures will take centre stage on Monday at 09:00 GMT after the ECB president Christine Lagarde clarified that future policy decisions will be made meeting by meeting based on incoming economic data. Forecasts point to a modest slowdown in inflation, but such a drop may not be enough for investors to push back their rate hike expectations. Meanwhile, the economy is expected to show a slight quarterly contraction in the second quarter.
ECB tweaks guidance
The European Central Bank (ECB) raised its deposit facility rate by 25 bps as expected on Thursday, but a dovish tweak in policy guidance suggested that the rate hike cycle is nearing the end, dragging the euro below 1.10 against the US dollar.
Specifically, the governing council reported that “future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to the 2% medium-term target”, whereas in its June statement it had said that interest rates will be “brought to sufficiently restrictive levels”, implying more rate increases ahead.
Despite the dovish change in the sentence, the rest of the statement could barely support a strong pause in the September meeting. Instead, it messaged that the board will continue to “follow a data-dependent approach, and particularly, each policy decision will be based on its assessment of the inflation outlook.
Inflation forecasts
Although headline inflation has slowed down considerably from November’s peak of 10.6% y/y, the central bank remains way off its 2.0% inflation target. Consumer prices rose by 5.5% y/y in June and are expected to slow to 5.2% y/y in July. Strikingly, the core measure, which excludes volatile food, energy and tobacco prices, and therefore provides a better picture on the inflation trend, is forecast to fall moderately to 5.4% y/y from 5.5% y/y previously.
Hence, if forecasts are correct, an irreversible pause as soon as September may not be the right call at the moment. Futures markets are currently providing little chance for another 25bps rate hike to 4.0% by the end of the year. However, if August’s inflation prints appear more than twice the central bank’s target and the economy shows signs of recovery, policymakers could hit the media with a new hawkish communication.
GDP growth data will be closely watched too
Growth figures could play a key role at the current stage as well. The Eurozone economy is in worse shape than the US, and if the situation develops into stagflation, as the war in Ukraine and Russia’s recent unilateral withdrawal from the Black Sea Grain Initiative increase the risk for another surge in food and energy prices, the central bank could find itself in a hard and a rock place.
Preliminary GDP data are expected to show a quarterly growth of 0.2% in Q2 after flat growth in Q1, though the year-on-year comparisons might result in a weaker expansion of 0.5% from 1.0% before.
EUR/USD
Turning to FX markets, euro/dollar experienced its worst daily session since March in the ECB aftermath, erasing a big portion of its impressive July spike. A softer-than-expected slow down in CPI figures could bolster talks for a rate hike in September, especially if GDP readings surprise to the upside. In this case, the pair could surge above the nearby resistance of 1.1040-1.1055 and towards the 50-period simple moving average (SMA) on the four-hour chart at 1.1090.
Alternatively, if inflation drops more than analysts anticipate, and the economy shrinks at a faster pace, euro/dollar could slip below 1.1000 to retest the 1.0960-1.0940 support area. A break lower could bring the 1.0900 round level next on the radar.
Eurozone preliminary CPI inflation figures will take centre stage on Monday at 09:00 GMT after the ECB president Christine Lagarde clarified that future policy decisions will be made meeting by meeting based on incoming economic data. Forecasts point to a modest slowdown in inflation, but such a drop may not be enough for investors to push back their rate hike expectations. Meanwhile, the economy is expected to show a slight quarterly contraction in the second quarter.
ECB tweaks guidance
The European Central Bank (ECB) raised its deposit facility rate by 25 bps as expected on Thursday, but a dovish tweak in policy guidance suggested that the rate hike cycle is nearing the end, dragging the euro below 1.10 against the US dollar.
Specifically, the governing council reported that “future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to the 2% medium-term target”, whereas in its June statement it had said that interest rates will be “brought to sufficiently restrictive levels”, implying more rate increases ahead.
Despite the dovish change in the sentence, the rest of the statement could barely support a strong pause in the September meeting. Instead, it messaged that the board will continue to “follow a data-dependent approach, and particularly, each policy decision will be based on its assessment of the inflation outlook.
Inflation forecasts
Although headline inflation has slowed down considerably from November’s peak of 10.6% y/y, the central bank remains way off its 2.0% inflation target. Consumer prices rose by 5.5% y/y in June and are expected to slow to 5.2% y/y in July. Strikingly, the core measure, which excludes volatile food, energy and tobacco prices, and therefore provides a better picture on the inflation trend, is forecast to fall moderately to 5.4% y/y from 5.5% y/y previously.
Hence, if forecasts are correct, an irreversible pause as soon as September may not be the right call at the moment. Futures markets are currently providing little chance for another 25bps rate hike to 4.0% by the end of the year. However, if August’s inflation prints appear more than twice the central bank’s target and the economy shows signs of recovery, policymakers could hit the media with a new hawkish communication.
GDP growth data will be closely watched too
Growth figures could play a key role at the current stage as well. The Eurozone economy is in worse shape than the US, and if the situation develops into stagflation, as the war in Ukraine and Russia’s recent unilateral withdrawal from the Black Sea Grain Initiative increase the risk for another surge in food and energy prices, the central bank could find itself in a hard and a rock place.
Preliminary GDP data are expected to show a quarterly growth of 0.2% in Q2 after flat growth in Q1, though the year-on-year comparisons might result in a weaker expansion of 0.5% from 1.0% before.
EUR/USD
Turning to FX markets, euro/dollar experienced its worst daily session since March in the ECB aftermath, erasing a big portion of its impressive July spike. A softer-than-expected slow down in CPI figures could bolster talks for a rate hike in September, especially if GDP readings surprise to the upside. In this case, the pair could surge above the nearby resistance of 1.1040-1.1055 and towards the 50-period simple moving average (SMA) on the four-hour chart at 1.1090.
Alternatively, if inflation drops more than analysts anticipate, and the economy shrinks at a faster pace, euro/dollar could slip below 1.1000 to retest the 1.0960-1.0940 support area. A break lower could bring the 1.0900 round level next on the radar.
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