- Headline HICP inflation falls to 5.2% (5.3% expected) while core HICP remains at 5.3%
- Further declines expected over the remainder of the year
- Divergence warns of potential exhaustion in the sell-off
Eurozone headline inflation was slightly lower than initially reported in August while core was unrevised and is now modestly higher.
Both are expected to fall going into next year and today’s revisions are unlikely to alter the view of the ECB which has already decided that no more rate hikes will likely be needed. As with all favorable data though, it may come as a small relief that surprises in the data are finally in the right direction.
Shortly after the data, the OECD released its growth forecasts for this year and next and it won’t come as a surprise that the eurozone has seen its downgraded by 0.3% and 0.4%, respectively. That lower activity is likely what’s led to the ECB probably calling it a day on rate hikes.
Also interesting from the forecasts ahead of the Fed meeting was that the US saw upgrades for both years, very much against the trend. That resilience has contributed to inflation rising higher than expected and being harder to contain and may encourage the Fed to hold off from signaling the end of the cycle tomorrow, as the ECB did last week.
Can we see a correction after the recent sell-off?
From a fundamental perspective, it is possible as the ECB has now adopted a more dovish stance than many anticipated and is unlikely to become more dovish soon. The Fed could match it which may make things interesting but there may be more hesitancy there.
Source – OANDA on Trading View
Then there’s the technicals which are also starting to point to exhaustion in the sell-off. The MACD histogram is making higher lows as the price makes lower lows while the moving averages and the stochastic are flattening which may suggest we’re at a turning point. Such a divergence doesn’t point to an imminent reversal in itself, but it does suggest the trend is weakening.
It’s run into support around 1.07 and is now testing support from a couple of weeks ago after only recently breaking through the 200/233-day simple moving average band. The recent high around 1.0770 could be interesting, if broken, and point to a potential corrective move in the pair.
A rotation lower from here and below 1.07 would be interesting, especially if we see further divergences forming between price and the MACD and stochastic. The next most notable level below is 1.05, having been a key level in this pair over a number of years.
