Week in FX Europe – ECB not influenced by flash CPI

  • Geopolitical tension on the rise
  • Euro flash CPI has not changed ECB consensus
  • Italian job numbers break trend

Month-end portfolio demand, geopolitical and event risk are all taking a stab at making an impact on forex prices. So far, and not unfamiliar, investors continue to wade through the same contrived trading ranges, but this time the EUR bear must be feeling a tad stronger in their convictions.

It was only natural that investors would adopt a cautious tone early Friday, ahead of Euro inflation numbers. A stable or slightly declining inflation reading would be expected to definitely reduce some pressure on the ECB to take immediate policy action at next weeks policy meet. Nevertheless, the Eurozone’s CPI Flash Estimate reading of +0.3%, y/y (expected +0.4%), the lowest in five-years, seems unclear if it’s enough for ECB to act again so soon based on the EUR’s initial price response of limited movement (€1.3179).

Europe floundering

The German economy – Europe’s backbone – seems to be stalling, and this despite a healthy employment front, as both exports and business confidence is being clouted by the uptick in tensions with Russia. The obvious knock on effect should be having a negative impact on German Q3 GDP numbers. Euro investors are closing this week out by adopting a cautious trading strategy. The German DAX (9,452.88 -0.10%) is trading small in the red, after rebounding tentatively from yesterday’s sudden resurgence in geopolitical risk (-1.1%). With North America entering a “long” holiday weekend, event risk positioning should dominate late day trading during their session. Surprisingly, the DAX trades close to breakeven on the day despite German retail sales figures for July posting the biggest monthly fall (-1.4%, m/m, real, calendar and seasonally adjusted) in two-years.

Obviously, Euro flash CPI estimate was the highlight of the session, and for many, was perhaps the final piece of the puzzle for the ECB policy outlook. Nonetheless, there were no surprises and has still left the debate open for the ECB whether it would take on fresh measures or continue to pause and watch the effects from its historic June move. Draghi last week hinted that the ECB could be preparing further stimulus and even raised the prospect of QE being employed. Those very hints have allowed global equities a free pass to higher territory while applying further pressure on the EUR.

ECB’s next step

In reality, rational minds have concluded that the ECB is most likely to want to gauge the impact of its June measures and to assess the take up of the targeted longer-term refinancing operation (TLTRO) before taking further action. Draghi expects +€1T to be snatched up and policy makers will want to gauge the effectiveness of channeling money back into the “real economy” before becoming too trigger-happy. The ECB is definitely looking at a program to buy asset-backed securities and further details could be announced next week on structure and execution.

On the flipside, there are a few who believe that the ECB will be expected to cut refi and deposit rates by -10bps on September 4. They feel that the failure to act will only intensify the fall in Eurozone inflation expectations. The consensus believes that the ABS program is not yet ready, hence why the EUR dove is leaning heavily on why lower rates is the most likely course. A cut in rates will also help boost demand for the first TLTRO scheduled for September 18.

Euro peripheries make a decision harder

This morning’s Italian July unemployment headline broke its recent improving trend and was not too far from the record high level set back in January. The country’s official jobless rate advanced to +12.6% in July from +12.3%, m/m. Some -31k jobs for men have been lost, while -4k positions for woman have been shed. The youth unemployment rate – the future 15-24 year olds – fell to +42.9% – a -0.8% fall m/m, but a +2.9% increases, y/y.

The EUR/USD outright has managed to hold above its 11-month low of €1. 3153 set earlier in the week, but interestingly has not been able to climb back above the psychological €1.32 handle after the CPI data.

What to expect next week

It’s a North American holiday on Monday. Despite the uptick in geopolitical tension – Russia vs. the rest of the world – CBanks monetary policy rate decisions and North American employment data will be taking center stage.

The RBA kicks the week off with its rate decision on Tuesday, followed by Aussie GDP and Retail Sales later in the week. The BoJ, the highly anticipated ECB (ABS details expected), and BoE will dominate Thursday’s action. The neutral BoC appears on Wednesday, while Friday’s Canadian jobs and NFP round off what should be an action packed week.


* GBP BOE Inflation Report
* AUD Reserve Bank of Australia Rate Decision
* USD ISM Manufacturing
* AUD Gross Domestic Product
* EUR Euro-Zone Gross Domestic Product
* CAD Bank of Canada Rate Decision
* GBP Bank of England Rate Decision
* EUR European Central Bank Rate Decision
* USD Change in Non-farm Payrolls
* USD Unemployment Rate

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments.
He has a deep understanding of market fundamentals and the impact of global events on capital markets.
He is respected among professional traders for his skilled analysis and career history as global head
of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean
has played an instrumental role in driving awareness of the forex market as an emerging asset class
for retail investors, as well as providing expert counsel to a number of internal teams on how to best
serve clients and industry stakeholders.
Dean Popplewell