Eurozone inflation above forecast in August

Eurozone HICP inflation jumped again in August. Here is what happened in August:

  • Headline Eurozone HICP inflation increased by +0.5% in August which means it is 9.1% higher than 12 months ago (up from 8.9% in July). This was ahead of the 9.0% consensus forecast.
  • Core Eurozone HICP inflation increased by +0.5% in August. This took inflation to 4.3% higher than 12 months ago (up from 4.0% in July). This was ahead of the 4.1% consensus forecast.

Yet again too, this has been a forecast-busting rise. Headline Eurozone inflation has been above forecast in the past four months. There has not been a lower than forecast month since March 2021.

What does this mean?

Core Eurozone inflation is more than double the European Central Bank’s target of 2.0%. The hawks on the ECB’s Governing Council have already been growing increasingly vocal in recent days. This will only help to fuel this further.

There has been a firm expectation that there will be a 50 basis points hike at the ECB’s monetary policy meeting next week. However, there have been hawkish voices on the ECB that have been pushing for 75bps. With inflation coming in ahead of expectation, this will ensure that there will be a serious discussion of 75bps next Thursday.

The argument against a more hawkish move from the ECB next week lies with the lack of demand in the Eurozone. Household consumption remains weak, whilst retail sales are negative (falling by -3.7% in June) and have been trending lower for the past 8 months. There is also no evidence of a “wage-price spiral” as Q2 wage growth was 2.1%. 

The Eurozone is suffering more with supply-side inflation. Goods inflation is being driven by the gas crisis and transportation issues (drought drying crucial river supply lines). Hiking interest rates aggressively may hit the economy more than tempering inflation. The ECB has a fine balancing act on its hands.

However, as we have been noting recently, ECB hawks are pushing for higher rates. There are three meetings left this year. Having the interest rate up at around 2.00% (another +1.50% from here) is certainly possible. 

Market Reaction

We have been seeing a more supportive outlook for the EUR in recent days. Markets have been responding to the hawkish noises from the ECB. EUR/USD has dropped back (along with other major currencies) as the USD has regained some strength today.

However, EUR has been supported in the wake of the Eurozone inflation surprise this morning. It will be interesting to see if this helps to bolster EUR performance once more.

EUR/USD has been finding consistent buyers around 0.9900/0.9950 over recent sessions. If the support at 0.9980 can hold into the close today it would also add to the sense of support. Unless there is a significant USD strengthening (mind out for Nonfarm Payrolls on Friday) we are still looking at the prospect of a EUR/USD rebound into the 1.0100/1.0200 resistance area.

However, perhaps the better way to play the EUR is through the EUR/GBP cross. A rally through the resistance band 0.8510/0.8550 was a key move. This now becomes a good basis of breakout support to buy into weakness. With strong momentum, we look for a move towards a test of 0.8675/0.8720.


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