EUR/USD remains undermined on mixed Eurozone CPI

Bank notes of different currencies
Fawad Razaqzada
By :  ,  Market Analyst

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.

  

EURUSD chart

 

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