Eurozone Inflation Preview: Growth in headline, core prices set to slow slightly in August

• Eurostat will publish the high-impact Eurozone inflation data on Thursday, August 31.
• Headline HICP is set to fall to 5.1% YoY, Core figure to decline to 5.3% in August.
• Eurozone inflation data holds the key for the ECB’s next policy move, rocking the Euro.

“The fight against inflation is not yet won,” European Central Bank (ECB) President Christine Lagarde said at an annual conference of central bankers in Jackson Hole last Friday.

Lagarde added that interest rates in the European Union will need to stay high “as long as necessary” to slow still-high inflation. Therefore, the upcoming Eurozone inflation data will hold the utmost significance in determining the next interest rate move by the ECB.  

Money markets are pricing a 51% probability of an ECB rate hike pause at the September meeting. Bloomberg’s world interest rate probabilities (WIRP) suggest odds of a 25 basis points (bps) hike stand near 35% for next month, at 50% for October 26 and top out near 70% for the December 14 meeting.  

What to expect in the next European inflation report?

Eurostat will release the preliminary estimate of the Eurozone Harmonized Index of Consumer Prices (HICP) on Thursday, August 31.

The annual Core HICP inflation, the gauge closely watched by the European Central Bank, is seen dropping to 5.3% in August from 5.5% in July. The headline Eurozone Harmonized Index of Consumer Prices is expected to rise 5.1% YoY in August, a slight slowdown from July’s increase of 5.3%.

On a monthly basis, the old continent’s HICP is likely to decline 0.1% in August. The core HICP inflation is foreseen at 0.3% in the reported month when compared to July’s decline of 0.1%.

Inflation in over 20 countries that use the Euro has dropped from a peak of 10.6% last year to 5.3% last month, largely reflecting sharp declines in energy prices. But inflation still remains more than double the ECB’s 2.0% target.

Previewing the August inflation data, TD Securities explains: “While continued soft momentum in food and core goods inflation should put further downside pressure on inflation in Germany and the EZ, the recent surge in oil prices will keep headline inflation from falling much. Services inflation is still key for the ECB though, and here we see another strong m/m print, though base effects should push the y/y rate down a touch.”

Dovish ECB expectations gained traction after activity in the bloc's dominant services industry contracted for the first time this year and the downturn in the manufacturing sector continued, according to the PMI survey’s data. The Eurozone HCOB Manufacturing Purchasing Managers Index (PMI) rose to 43.7 in August when compared to the market forecasts of 42.6 and above the 42.7 seen in July. The index hit a three-month high. However, the Services PMI declined to 48.3 in August from 50.9 in July, hitting a 30-month low and way below the 50.5 estimates.

The European Central Bank remains committed to bringing inflation back to its 2.0% target without causing a recession, which puts the central bank in a tough spot on the interest rate outlook.

As usual, some member states have already published their national inflation figures for August, providing clues over the direction of the whole Eurozone HICP data.

Spain's Consumer Price Index (CPI) rose 2.6% YoY in July, courtesy of higher fuel prices, preliminary data from the National Statistics Institute (INE) showed on Wednesday. The harmonized annual inflation rate climbed to 2.6%, as against the June figure of 2.3% while matching the expected 2.6% figure.

Germany’s headline annual HICP rose 6.4% in August, compared with the 6.5% previous month’s increase and the 6.2% forecast for August. 

Since the annual inflation in Germany and Spain barely slowed in August as against expectations, it raises the stakes for an upside surprise in the Eurozone inflation data.

When will the Harmonised Index of Consumer Prices report be released and how could it affect EUR/USD?

Eurozone preliminary HICP is slated for release at 09:00 GMT on Thursday. In the lead-up to the Eurozone inflation showdown, the Euro (EUR) is ranging close to the 1.0800 round level against the US Dollar, as investors prefer to remain on the sidelines. Additionally, the latest hawkish remarks by the US Federal Reserve (Fed) Chairman Jerome Powell at the Jackson Hole Symposium have revived expectations of one more Fed rate hike in 2023, keeping the US Dollar afloat.

A hotter-than-expected headline and core HICP inflation data could reinforce expectations for a September ECB rate hike. In such a scenario, EUR/USD could extend its recovery toward the psychological level of 1.1000. However, if the bloc’s inflation declines at a faster pace than expected, the main currency pair is likely to test the downside near 1.0700.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “EUR/USD failed to find acceptance above the horizontal 100-Daily Moving Average (DMA) at 1.0925 on a daily closing basis on Wednesday. However, the 14-day Relative Strength Index (RSI) is defending the 50 level, as we head close to the Eurozone inflation data release.”

Dhwani also outlines important technical levels to trade the EUR/USD pair: “Further upside needs validation from the 100 DMA resistance, as Euro bulls look to target the 50 DMA at 1.0971 en-route the 1.1000 level. Alternatively, strong support aligns at the previous day’s low of 1.0855, below which the downside will open up toward the mildly bullish 200 DMA at 1.0814.”