Euro area annual inflation fails to boost the euro

By:
on Aug 31, 2023
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  • Euro area annual inflation remains well above the ECB target
  • The odds are high for a September rate hike
  • The euro traded with a weak tone prior to the release

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One of the most-awaited pieces of European economic data was released today – the annual inflation. The market participants were keen to find out the change, if any, in the prices of goods and services, considering the big debate about a September rate hike from the European Central Bank (ECB).

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As it turns out, the data is unlikely to move the needle for the ECB. While core inflation came out stable, at 5.3%, the flash estimate was higher. Food, alcohol, and tobacco prices have contributed the most to the rise in the flash estimate CPI.

How did the euro react to the annual inflation release?

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The euro rallied in the past two days. EUR/USD, in particular, bounced from below 1.08 and rallied close to 1.0950.

But the rally faded, as the market reversed all its yesterday gains. In fact, it did so even before the inflation report came out today.

One explanation might be that the market participants have sold the euro on expectations of a bigger drop in annual inflation. As such a change did not materialize, we should not be surprised to see the euro trading with a bid tone again.

What does the report mean for the September ECB meeting?

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This is where it becomes interesting for the euro. Will the ECB hike again in September?

The Fed is almost certainly to stay put. It means that a rate hike from the ECB would narrow the interest rate differential – a net positive for the EUR/USD exchange rate.

But there are voices that the ECB should not hike in September, given the weakness in the manufacturing and services sectors. However, considering inflation is still well above the 2% target, the odds are that the ECB will not blink and raise the key interest rates again.

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EUR European Central Bank Central Banks Economic Inflation