The Eurozone is scheduled to publish initial inflation estimates for the month of September on Friday at 0900 GMT and analysts believe that consumer prices picked up steam after a small pullback in August. The stats, however, are not likely to have any near-term impact on monetary policy as the ECB has already guided markets about both the path of interest rates and its quantitative easing program.
In August, Eurostat reported that the Eurozone Harmonised Consumer Price Index (HICP) eased to 2.0% on a yearly basis from 2.1% a month earlier, though increases in energy, food, and alcohol kept the gauge above the ECB’s “below but close to 2.0%” price target. In September, headline inflation is projected to recover back to 2.1% as oil prices maintained positive momentum, while in the absence of volatile items such as food and fuel, core CPI is also anticipated to rebound by 0.1 percentage points to 1.1%.
The core measure, which the central bank uses as an indication for long-term inflation pressures, proves that price growth above the target could be a temporary story. Therefore monetary policy may need to stay accommodative in the Eurozone for some time, with central bankers adopting a wait-and-see approach for now before removing a layer of stimulus. The ECB chief, Mario Draghi, though, speaking at the Economic and Monetary Affairs of the European Parliament on Monday said that core inflation is expected to improve further in the coming months as the tightening labour market is driving wage growth higher. Indeed, hourly labour costs in the eurozone grew by 2.2% y/y in the second quarter, printing the fastest expansion since the third quarter of 2012. Specifically, the costs of wages and salaries increased by 1.9% y/y compared to 1.8% in the preceding quarter. That was the third consecutive month of gains for the EU employees. Latvia and Lithuania led the rise in overall labour costs.
Yet while EU employees might be enjoying better payments, preliminary estimates on consumer confidence found that consumers outlook on future economic activities in the bloc has deteriorated to a one-year low of -2.9 in September. That could be evidence that consumers are not planning to spend more on goods and services in the months ahead, restricting any inflation spikes. On the supply side, business leaders looked less confident as well about the Eurozone’s economic outlook in the next six months according to the Sentix Investor Confidence Index which declined by 1.3 points to 12. Initial Markit Manufacturing PMI out of the bloc added further doubt as the figure slipped to 53.3 in September, the lowest since October 2016.
Given the above, the central bank has no reason to call off its forward guidance by hiking rates earlier than summer 2019, especially now when risks from US trade protectionism are boiling and emerging markets are facing economic headwinds. Not to mention the Italian fiscal puzzle, which threatens to breach the EU’s budget limits, exposing the bloc to potential shocks.
Turning to FX markets, the euro is set to finish the month in the green against the US dollar, gaining 1.6% so far in September. That could have weighed on inflation too as an appreciating currency makes imports cheaper in the domestic market. In the wake of stronger HCPI figures, EUR/USD could crawl back above Thursday’s peak of 1.1815 with scope to reach 1.1850, the 50% Fibonacci of the down-leg from 1.2412 to 1.1300. Steeper increases may meet the 1.1900 key level as well ahead of the 200-day simple moving average currently at 1.1940.
Alternatively, a miss in data could send the pair down to the 1.1700 round level, while even lower the 1.1650-1.600 area may provide support too, as it did in the recent past.
Before the Eurostat inflation report, however, investors could look at the German preliminary inflation figures due on Thursday for direction given the strong correlation between the Eurozone and German HCPI (see the above chart). Forecasts suggest that the headline HICP in the biggest EU economy inched up by 0.1 percentage points both in monthly and yearly terms to 0.1% and 2.0% correspondingly. Should the German figures surpass projections, investors could project similar results in the Eurozone inflation report.
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