EU CPI Data Preview

Another expected rise in inflation in the shared economy is likely to solidify bets ECB will raise rates at its next meeting.
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Where things are going
Last week's release of the minutes from the last ECB meeting showed that there was intention to keep tightening, implying that another "double" rate hike would be expected for the September meeting. The only element at this point that could shake market confidence in that assessment could be the latest CPI figures, which are the ones the central bank will have in mind at its meeting.

Tomorrow, we have the release of German CPI figures, which could "preview" what the figures for the full continent could show. German inflation is expected to rise to 7.8% from 7.5%. That upward trend is expected to be confirmed with Prelim August annualized inflation expected to advance to 9.0% from 8.9%. The move is in line with the expected core inflation rate moving to 4.1% from 4.0% prior.

The possible reaction
EU inflation is now already higher than the US, but the ECB interest rate is much lower, implying that real rates in the Eurozone are well behind the dollar. But the situation is not as dramatic when compared to the UK, where inflation was last reported at 10.1%. That implies (should the expectations be borne out) that the real rate spread between the UK and the Eurozone would be just 0.65% in favor of the pound.

So far, UK inflation has been rising at a faster rate than Europe, despite the ECB being much slower to act than its English counterpart. But inflation in both economies is growing faster than monetary policy is changing, implying it's a bigger driver in the forex market. As long as that dynamic persists, the pound could weaken against the shared currency. Particularly if in the next cycle, the BOE goes back to raising by 25bps and the ECB moves by 50.

EUR/GBP firm above 200/50 cross
EUR/GBP prices bounced higher after retesting the 200/50 SMA cross area near 0.8433. Above 0.8500 the said level is support, with upward continuation extending to the round 0.8600 level next. If the local low weakens, 0.8400 and 0.8350 are near and local supports. In case the latter fails to hold, the channel breakout would be confirmed and the uptrend would be likely cancelled. 0.8250 might be revisited if that’s so. But if 0.8600 breaks, we could see the 0.8700 and beyond being reached.

Key takeaways
The ECB might “double” hike again in September if the latest CPI figures expected this week show that inflation kept rising. German inflation will offer investors a ‘preview’ of what the central bank will have to deal with prior to the Eurozone figures come out on Wednesday.

As inflation in the Eurozone is still lower than inflation in the UK, the pound is in a better position due to lower interest rates in the EU. But UK inflation is rising faster than Eurozone’s and if BOE monetary policy lags ECB in the next cycle, the pound could weaken against the euro.