EZ CPI expected to drop in August; DAX 40 nearing all-time high

The Eurozone will release its first reading of the August consumer price index on Friday. After a stubborn reading in July, investors will be wanting to know if prices have moderated again, enough to allow the European Central Bank (ECB) to cut rates again. Market pricing currently shows a strong certainty that the bank will cut its rates by 25 basis points at their meeting in September, with a 99% chance priced in. Whether the CPI data can skew this conviction will remain to be seen.

Analyst estimates show an expected drop in August, especially in headline CPI. The data is forecasted to come in at 2.2%, down from 2.6% in July. If confirmed, it would be the lowest reading in three years. Meanwhile, core inflation, which has been stickier given the resilience in the services sector, is expected to ease from 2.9% to 2.8%. Prior to the eurozone figures we will see the major economies in the block releasing their flash CPI readings for August, with the majority of them anticipating a significant drop in prices. If it turns out not to be true, then markets may move to price in a smaller chance of a rate cut from the ECB before the EZ data is released on Friday morning.

EUR/USD daily chart

Past performance is not a reliable indicator of future results.

If things go as expected, we could see the euro continue to strengthen against the dollar. EUR/USD has risen over 5% in the past two months reaching a 13-month high at 1.12. This psychological level has remained elusive so far with a reversal taking place as soon as price neared the level, but the bias remains positive. All in all, traders now expect the Federal Reserve will need to ease policy quicker than the ECB in the next 12 months, which is unwinding some of the carry trade in favour of the euro. Consolidation above the 1.12 mark will likely remain a key target for EUR/USD buyers over the coming weeks.

Elsewhere, European equities have regained the bullish appetite with the German DAX 40 looking to break to a new all-time high. The index has broken above a descending trendline that was limiting the topside since May, also offering some resistance earlier this week. The move above it has consolidated the bullish appetite and the RSI still has some room to go before becoming overbought, suggesting the bullish momentum could continue over the next few days. Thursday and Friday are packed with economic data from Germany, which includes regional and national inflation readings, retail sales and the lates unemployment data.

DAX 40 daily chart

Past performance is not a reliable indicator of future results.


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