Inflation Showdown: Unraveling The Euro's Fate And Impact On Stocks

Tomorrow morning, the Euro Area’s consumer price inflation rate is set to be unveiled, anticipated to continue its downward trend. However, the magnitude of this decrease will play a significant role in shaping the European Central Bank’s (ECB) approach to future rate hikes. Last month’s preliminary estimate showed a decline to 5.5 percent in June 2023, down from 6.1 percent in the previous month, slightly below market expectations of 5.6 percent. While this drop marked the lowest rate since January 2022, it remained notably above the ECB’s target of 2.0 percent.

Notably, the core rate, excluding volatile items like food and energy, increased to 5.4 percent, remaining close to its recent peak of 5.7 percent. This strengthens the view that policymakers are likely to continue their rate hike trajectory in the coming months. Energy prices experienced a sharp decline of 5.6 percent (versus -1.8 percent in May), while prices for food, alcohol & tobacco, and non-energy industrial goods rose at a slower pace. On the other hand, services inflation picked up to 5.4 percent from 5.0 percent. On a monthly basis, consumer prices advanced by 0.3 percent in June.

In addition to the overall inflation rate, tomorrow’s reports will also shed light on the annual core inflation rate in the Euro Area, which excludes energy, food, alcohol, and tobacco. Last month, this rate rose for the first time in three months to 5.4 percent in June 2023 from 5.3 percent in May, just slightly below market forecasts of 5.5 percent. Back in March, core inflation hit a record high of 5.7 percent, indicating its significant impact on the economy. Comparatively, the core CPI increased by 0.3 percent from the previous month.

From a technical perspective, the EUR/USD pair is currently at the 100% extension, with traders grappling with uncertainty about its next move. Tomorrow’s data releases are poised to guide price action, potentially leading to either a pullback or an extension upwards. As the ECB continues to increase rates, the upcoming reports will offer insights into their stance, reflecting either more measured or assertive approaches. Surpassing expectations could indicate fewer rate hikes, fostering growth in equity markets. Conversely, stronger-than-anticipated inflation could prompt a more forceful response from the ECB, potentially leading to a decline in equity markets.