Eurozone inflation eases, putting worst case scenarios on hold
As inflation in the Eurozone continues to ease, the desk believes that the worst-case scenarios surrounding a potential price spike are being postponed, presenting a more favorable outlook for the EUR/USD pair. Per the full note from ing-think, Eurozone inflation fell from 3.2% in May to 2.8% in June, driven largely by lower energy prices. This trend appears to reinforce a dovish stance from the European Central Bank (ECB), as President Christine Lagarde's recent speeches suggest a potential reassessment of interest rate trajectories amid sluggish economic growth.
What the desk is arguing
The desk posits that the recent decrease in Eurozone inflation indicates a measured return to stability in economic conditions, thus alleviating immediate pressure on the ECB to hike rates. Per the full note from ing-think, energy inflation saw a significant retreat from 10.8% to 8.7%, suggesting that further easing in consumer prices may follow in July.
Additionally, core inflation shows a slight decline from 2.6% to 2.4%, indicating limited pass-through effects of rising input costs into consumer prices. This context implies weakened inflationary pressures, offering a buffer against sharp monetary policy tightening that could stifle growth, specifically in light of the ECB's off-site meeting being held in Sintra, Portugal, which is anticipated to focus on these evolving dynamics.
Where it sits in our coverage
Our internal consensus target for the EUR/USD stands at 1.075, with the range stretching between 1.04 and 1.12. Specific forecasts include: - jpmorgan: target of 1.10, Mar26 - bofa: target of 1.04, Mar26
This analysis aligns with jpmorgan, suggesting market sentiment is converging around a slightly bullish outlook, while the forecast by bofa appears more cautious given its lower target, reflecting divergent views on the future path of the ECB's monetary policy.
How other firms see it
Firms aligned with the easing monetary perspective include jpmorgan and others forecasting a gradual appreciation of the euro. In contrast, bofa presents a more bearish stance regarding the euro's prospects, factoring in potential economic headwinds.
Watch for developments in the ECB's communication strategy post-Sintra that could substantially influence the EUR/USD trajectory, particularly in conjunction with broader economic indicators such as PMI data and consumer sentiment metrics.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Eurozone inflation dips to 2.8%, alleviating worst-case inflation fears.
- 02Energy inflation has decreased, adding downward pressure on consumer prices.
- 03ECB dynamics suggest a dovish shift, affecting interest rate expectations.
- 04Economic sluggishness may hinder the pass-through of input costs into prices.
Market implications
Traders should closely watch the EUR/USD level around 1.075 as a critical pivot point. The upcoming insights from the ECB's Sintra conference could also provide strong directional cues for positioning ahead of any adjustments to interest rate forecasts.
Risks to this view
The bullish outlook could be negated if inflation data unexpectedly rebounds or if ECB signals a more aggressive tightening stance in response to economic pressures. Additionally, deterioration in economic growth indicators or significant geopolitical events could shift market sentiment sharply.
Older quick take Quick take 10:32 Eurozone inflation eases, putting worst case scenarios on hold The inflation rate fell from 3.2% to 2.8% in June. Is the inflation shock over before it really got going? With much lower oil prices and a sluggish economy, inflation risks are easing Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Bert Colijn Chief Economist, Netherlands The drop in June was in part related to oil price declines, which are starting to translate into lower prices at the pump.
Energy inflation fell from 10.8% to 8.7% in June. And because gasoline prices respond more slowly to the oil price on the decline than during an increase, this probably means that at current oil price levels, there is still more downward pressure on energy inflation for consumers to come in July. Then again, the question is whether current favourable oil price levels can persist.
As the Dutch and Germans found out at the World Cup, temporary excitement can quickly turn to misery if the underlying fundamentals remain shaky. But even at somewhat higher prices, it seems that worst-case scenarios have become less likely. Core inflation also fell in June, from 2.6% to 2.4%.
And with businesses having seen input costs increase, core inflation will likely increase further before it starts to ease again. But with oil prices lower, it will become harder to price through higher costs to consumers. Survey data on pricing intentions in industry and services already revealed easing ahead of the deal.
Both the PMI and European Commission sentiment survey indicated a softening of selling price expectations in June. And with the economy remaining sluggish for the moment and wage growth not showing immediate signs of increase, the breeding ground for broadening inflation may not be as fertile as previously thought. For the ECB – currently on its annual off-site in Sintra, Portugal – the outlook seems to be turning more dovish.
President Christine Lagarde opened the conference by saying the ECB doesn’t need to be as forceful as it was in 2022 to fight inflation. But the question is whether it needs to be forceful at all to do so. At this rate, it seems not.
But with uncertainty around the Middle East deal remaining, the ECB will appreciate some time to see how things play out and whether any force is still necessary. Inflation Eurozone Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
Read more Older quick take
Sources & References
How we cover this story