Battered euro looks to Eurozone’s inflation data for some reprieve – Forex News PreviewPosted on May 29, 2018 at 3:18 pm GMTMarios Hadjikyriacos, XM Investment Research Desk
The common European currency has plunged in recent weeks, as a combination of heightened political uncertainty in Italy, a slowing Eurozone economy, and an increasingly cautious tone by the ECB have taken their toll. In the midst of all this, the battered euro will look for some reprieve in Eurozone’s inflation data for May, due out on Thursday at 0900 GMT.
The past weeks have not been kind to the euro, which has plunged amid signs that a slowdown in Eurozone’s economy would lead the ECB to take a more cautious approach in scaling back its massive stimulus program. The inability to form a government in Italy, and the latest signs the nation may soon head to early elections exacerbated the selloff as investors fled the Italian bond market. Recent reports that Spain may be faced with snap elections too didn’t do the currency any favors either.
These concerns have led investors to materially push back the timing of the first expected ECB rate hike. The first 10bps deposit rate increase is currently fully priced in for Q4 2019; it was anticipated to come during Q2 2019 just a few months ago. So, while markets still appear relatively convinced the Bank will begin unwinding its asset purchase program (QE) later this year, they also think economic and political woes will keep it from raising rates for a while.
As such, Eurozone’s preliminary inflation data for May will be watched closely to either confirm or disprove this narrative. In May, the bloc’s headline CPI rate is forecast to have rebounded to 1.6% in yearly terms, after it pulled back to 1.2% in April. Meanwhile, the core rate (excluding food, energy, alcohol, and tobacco) is projected to have risen to 1.0%, after it dipped to 0.7% previously. Note that Germany’s flash CPI data will be released a day earlier, on Wednesday at 1200 GMT.
While economists’ forecasts are optimistic, other gauges of price pressures such as Markit’s preliminary Composite PMI for May were not quite as upbeat. The survey showed that “average selling prices for goods and services rose at the slowest rate since last September”, which in isolation, suggests the risks surrounding the CPI forecasts may be tilted somewhat to the downside. That said, any disappointment may be more visible in the core rate, as the headline is likely to be pushed up by favorable energy effects; Brent oil prices have risen 50% from May 2017. Another factor that could help inflation accelerate in the future is the euro’s plunge, which increases the price of imported goods. Even though these factors may boost headline inflation, they are still unlikely to cause the ECB to shift to a more hawkish stance, unless core inflation rises as well. Policymakers will probably view them as transitory forces that will fade over time and hence, not a reason to alter their policy stance – similar to what happened in early-2017. This is precisely why the core CPI rate is often considered more important for monetary policy decisions; it strips out energy-related effects.
Should the CPIs surprise negatively – particularly the core rate – that could amplify speculation the ECB may delay its normalization plans and hence, push the euro even lower. Looking at euro/dollar, immediate support to declines may be found at 1.1505, the May 29 low. A downside break would mark a lower low on the daily chart, opening the way for 1.1477, the July 20 bottom. Even lower, the pair could challenge 1.1435 initially and 1.1370 thereafter, these being the troughs of July 17 and July 13 respectively.
On the contrary, a positive surprise in these data could prove cause for a rebound in the euro. Resistance to advances in euro/dollar could come around the May 25 low of 1.1640, with potential upside break shifting attention to the May 28 peak of 1.1728. If the bulls overcome that zone too, then sell orders may be found near 1.1830, the top from May 22.EURUSD
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