Euro edges up after eurozone inflation jumps

The euro is in positive territory today and has pushed above the 1.0200 line. In the European session, EUR/USD is trading at 1.0213, up 0.16% on the day. I don’t anticipate much movement from the pair ahead of the weekend, with a light economic calendar in the US today.

Eurozone inflation hits new record

Eurozone inflation is expected to rise to 8.9% in July YoY, up from 8.6% in June. Energy prices continue to be the main driver behind surging inflation, with a massive 39% jump compared to July 2021. Anyone who has filled up a car will have noticed the sharp rise in petrol prices. Inflation is, however, much more broad-based than just energy prices, as food, alcohol, services and industrial goods are also rising in price. Herein lies the rub for the ECB, as broad-based inflationary pressures are difficult to reverse, and tend to push up inflation expectations as well.

The ECB joined the rate-tightening club very late in the game, although its lift-off hike of 0.50% earlier in July was higher than the 0.25% that the markets had expected. The ECB’s forward guidance had indicated a 0.25% move, but the ECB opted to disregard its guidance. It has now gone one step further, announcing after the July meeting that it would make rate decisions on a meeting-by-meeting basis, essentially throwing out forward guidance. Interestingly, the Federal Reserve has decided to follow suit, as Fed Chair Powell made a similar announcement after this week’s rate decision.

Amidst accelerating inflation, there was some good news as Eurozone GDP rose 0.7% QoQ in Q2, above the 0.6% gain in June and ahead of the 0.2% estimate. France and Italy also showed improved growth in the second quarter, but Germany, the locomotive of the bloc, failed to follow suit. Germany’s GDP fell to 0.0% QoQ, down sharply from 0.8% in Q1 and missing the very modest forecast of 0.1%. As the Ukraine war drags on and the threat of an energy crisis hovers above Europe, the outlook for the eurozone and the euro looks appears cloudy and uncertain.

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EUR/USD Technical

• EUR/USD faces resistance at 1.0304 and 1.0390
• 1.0191 is a weak support line. Below, there is support at 1.0105

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