- EMU CPI easily beats the consensus in August (a preliminary reading)
- Core gauge turns out to be in line with the forecast
- Euro remains confused possibly discounting mounting pressure from the ECB
The euro area inflation increased more than anticipated in August which could act in favor of the ECB when it meets in September 7. CPI rose 1.5% yoy against the forecast at 1.3% yoy. On the flip side, the core measure which strips out volatile components like food and energy stayed unchanged at 1.2% yoy being in line with the estimation. The reaction on the euro has been contained though as investors could be feeling mounting pressures from the ECB at its next week meeting.
Even as a 1.5% yoy figure has been the highest one in four months, it has yet to translate into the ex-change rate. As per our daily macroeconomic calendar, a reaction on the shared currency has proved to be muted. Firstly, investors could begin gearing up for the ECB’s meeting which has a chance to abound in dovish references from Chair Draghi mainly owing to a recent rally seen on the euro. Secondly, a higher headline print could have been already priced in as the readings from specific countries had suggested that possibility.
To sum up, despite higher inflation the case for the ECB to be hawkish during the next week’s meeting remains weak. Let us recall that a powerful rally seen on the common currency over the course of recent weeks could dial back inflation forecasts thereby act against a continuation of that move in the near term. If the ECB cuts its CPI forecasts, it could put a brake on the euro’s rally. This is especially true if the greenback gets back its appeal in the nearest future (possibly on the back of renewed odds for a hike in December).
Looking at the EURUSD chart one could spot that the pair has been in demand thus far, swings to the upside have been contained though. It’s worth keeping an eye on a resistance at 1.1915 – if it’s broken it could lead to an extended upward move. That said, a base scenario seems to be a comeback to a decline towards 1.1835 where a support area is placed. It could be arguably a critical place for bears to watch, if they manage to break it, a move could speed up its impetus.