EU CPI rises again in July. Will the ECB have to push back on rate cuts?

Inflation in the Eurozone rose once again in July. Preliminary data released this morning showed headline CPI rising 2.6% in the twelve months to July, higher than the 2.5% reported in June. Analysts had been hoping the figure would remain unchanged this month. Meanwhile, core CPI did come in unchanged in July at 2.9%, but analysts had been hoping for a drop to 2.8%. At first glance, the release has been stronger than anticipated, dampening hopes for another rate cut from the ECB in July. That said, the month-on-month readings for both headline and core inflation could offer some relief to investors hoping for softer inflation in the coming months. Core prices dropped 0.2% and headline prices remained unchanged at 0% in the month of July.



Current pricing for a 25-basis point cut from the ECB in September shows a 66% chance, slightly down after the stronger CPI data. The decision is likely to be a tight one and markets may sway on either side of the spectrum over the coming weeks. From past commentary one could expect Lagarde and her team to cut rates again in September regardless of the stronger CPI reading in July, which would be a similar scenario to what we saw in June when the bank first cut rates. The central bank has been clear in the past about not being on a pre-set path of rate cuts, meaning they are reactive to the data. But Lagarde has also pointed out that the ECB intends to be proactive rather than reactive when it comes to this cutting cycle, meaning the central bank wants to be forward looking and anticipate a period of economic slowdown. Because of this, the ECB may decide to cut rates in September as it gives itself wiggle room to ensure growth in the Eurozone continues even as inflation softens.

It is also important to note that there will be the August CPI release before the ECB meeting in September, so much of the decision could depend on that data, and how it relates to the higher-than-expected reading in July. For now, it seems like both the decision to cut rates or hold for another meeting could be justifiable.

On the charts, EUR/USD has regained some bullish appetite after the CPI release. The pair has been struggling over the past few weeks as a mild recovery in the US dollar has been dampening the bullish momentum. The moving averages seem to be offering some good support around the current levels but the 1.08 level could be in jeopardy over the coming days if buyers are unable to hold this reversal. 1.0850 could be the target over the coming days for a continuation of the bullish reversal.
EUR/USD daily chart

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