Eurozone core inflation falls, drags euro lower

The euro is lower on Thursday, after a 3-day rally which pushed the currency 1% higher. In the European session, EUR/USD is trading at 1.0861, down 0.57%.

Eurozone CPI steady, core CPI falls

Eurozone inflation was a mixed bag in August. Headline inflation was unchanged at 5.3%, missing the consensus estimate of a drop to 5.1%. There was better news from Core CPI, which dropped from 5.5% to 5.3%, matching the estimate.

The ECB will be pleased with the decline in core inflation, which excludes food and energy and provides a more accurate estimate of underlying press pressures. Many central banks, including the Federal Reserve, have taken pauses in the current rate-tightening cycle, but the ECB has raised rates 13 straight times. Will we see a pause at the September 14^th meeting?

The answer is far from clear. Inflation remains above 5%, more than twice the ECB’s target of 2%. The central bank is determined to bring inflation back down to target, but that would require further rate hikes and the weak eurozone economy could fall into a recession as a result. ECB member Robert Holzmann said today’s inflation report indicated that inflation remained persistent and admitted that the latest inflation numbers pose a “conundrum” for the ECB.

The markets aren’t clear on what to expect from the ECB, with the odds of a pause at 67% and a 25-basis point hike at 33%. ECB President Lagarde hasn’t provided much guidance, perhaps because she’s as uncertain as everybody else about the September rate decision.

Germany’s numbers continue to point downwards, as the eurozone’s locomotive has become an economic burden. The latest release, July retail sales, declined by 2.2% y/y, sharply lower than the revised -0.9% reading in June and below the consensus estimate of -1.2%.

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EUR/USD Technical

• EUR/USD is testing support at 1.0831. Below, there is support at 1.0780
• 1.0896 and 1.0996 are the next resistance lines

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