EUR/USD remains undermined on mixed Eurozone CPI
Fawad Razaqzada July 1, 2022 12:03 PM
Inflation hits a fresh record high in the Eurozone
The Eurozone CPI data came in earlier, although we already had inflation data from several countries in the block earlier in the week, meaning it didn’t have a significant impact on the markets. Nevertheless, the Eurozone inflation rose to a fresh record high, while consumer, business and investor sentiment all continue to drop. Stagflation is the key risk facing the Eurozone, which means the euro is going struggle to shine much even as the ECB has paved the way for aggressive 75 basis point rate hikes in July and September. Additionally, the fact that inflation has been diverging across the eurozone means the ECB will have a tough time with its anti-fragmentation tool and may make a bigger mess out of the whole situation.
The headline CPI accelerated to a fresh record high of +8.6% in June, compared to +8.4% y/y expected and +8.1% in May. This clearly lays down the case for bigger rate hikes, which the ECB has already pre-committed to. However, there was some good news: Core CPI eased to +3.7% vs +3.9% y/y expected, edging lower from +3.8% in May. This is arguably positive in that core prices have – for now at least – stopped accelerating.
But there is a bigger problem: intra-Europe inflation divergence:
- Spain 10.2%
- Italy 8.0%
- Germany 7.6%
- France 5.8%
- Eurozone 8.6%
The fact that inflation so variant across the zone means it will be uncomfortable for the likes of Germany and France to back aggressive hikes from the ECB while also allowing the central bank to buy bonds of peripheral countries to mitigate the bond market sell-off in those nations. What all this points to is messy monetary policy and potentially political disorder.
Against this backdrop, and given tensions related to the war in Ukraine and now NATO's expansion, it makes it a difficult environment for investors to confidently invest in the Eurozone.
With the 1.05 handle broken, you would feel that the EUR/USD is now almost certain to drop to a new low for the year, after a very poor performance in the first half of the year.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.