The Eurozone will see the release of its preliminary inflation data for June on Friday, at 0900 GMT. Forecasts point to another slight acceleration in prices pressures, which although may be energy-driven would still enhance the narrative that inflation is moving in the desired direction, potentially helping the euro recover some of its recent losses. Besides the data, the outcome of the EU summit could also prove crucial for the common currency’s fortunes.
The common European currency stabilized somewhat in recent weeks, with euro/dollar oscillating in a range between 1.1506 and 1.1850 so far in June. While Italian political risks eased somewhat, helping the euro to post a small relief rally, the European Central Bank (ECB) appeared dovish at its June policy meeting, triggering a renewed selloff. Although the Bank announced an end-date to its QE program – noting increased confidence that inflation will move higher amid solid economic performance and a pickup in wages – it also stressed interest rates will remain unchanged for at least another year, dampening expectations for any aggressive moves.
The key takeaway was that the ECB will move ultra-cautiously towards normalizing policy, and that its actions are highly dependent on its economic forecasts materializing, implying that any sharp deterioration in Eurozone data has the capacity to delay, or even derail, such plans. This puts even more weight than usual on upcoming data, and most notably on the bloc’s inflation prints.
In June, the Eurozone’s preliminary CPI rate is projected to have ticked up to 2.0% in yearly terms, from 1.9% back in May. This would bring it above the ECB’s target of “below, but close to, 2%”. That said, the core CPI rate – which excludes volatile food and energy items – is expected to have held steady at 1.3%, signaling that the acceleration in the headline print may be owed primarily to energy effects. Importantly, the ECB typically “looks through” energy-induced movements, as it considers them transitory effects that will fade over time and should thus not influence policy decisions.
As for gauges of inflationary pressures, the bloc’s Markit Composite PMI showed that average selling prices for goods and services rose at the third-fastest pace in the last seven years in June. In isolation, this suggests an upside surprise in the CPIs may be somewhat more likely than a downside one.
Technically, looking at euro/dollar, resistance to advances may be found around 1.1625, defined by the inside swing low on June 25. A potential upside break could open the way for 1.1720, the high of June 26, with even further bullish extensions bringing into scope the June 14 peak of 1.1850.
On the downside – in case a negative surprise in the CPIs generates speculation for an even more cautious ECB – immediate support to declines could come near the 11-month low of 1.1506, posted on May 29. Even lower, attention could shift to the 1.1450 zone, marked by the peak of 29 June, 2017. A downward violation would increasingly bring into view the 1.1370 area, identified by the lows of 13 July, 2017.
Finally, besides the inflation data, the other major theme that could impact price action in euro/dollar is the EU summit that will conclude on Friday. German Chancellor Merkel’s fragile coalition government is at risk of collapsing should she return home without a deal on immigration, potentially sending Europe’s largest economy to early elections. Any signs of political instability in Germany could act as a drag on the euro, and vice-versa.
