Euro shrugs after mixed inflation report

• Markets show little reaction to Friday’s eurozone inflation report
• Headline inflation falls but core rate unchanged

The euro is steady at the start of the week. In the North American session, EUR/USD is trading at 1.0886, up 0.13%. With a very light data calendar on Monday, I expect the euro to remain calm for the remainder of the day.

Eurozone headline inflation falls, core inflation unchanged

The week ended with a mixed inflation report out of the eurozone and the euro showed little reaction. Inflation was confirmed at 5.3% y/y in June, down from 5.5% in June. This marked the lowest level since January 2022 and was driven by a decline in energy prices. Core CPI remained unchanged at 5.5% in July, confirming the initial reading. The news was less encouraging from services inflation, which rose from 5.4% to 5.6% with strong wage growth driving the upswing. The labour market remains tight and inflation is still high, which suggests that wage pressure will continue to increase.

Inflation has been moving in the right direction but core inflation and services inflation remain sticky and are raising doubts, within the ECB and outside, if the central bank’s aggressive tightening cycle can bring inflation back to the 2% target. The deposit rate stands at 3.75%, its highest level since 2000. The ECB’s primary goal is to curb inflation but policy makers cannot ignore that additional rate hikes could tip the weak eurozone economy into a recession.

The ECB meets next on September 14^th and there aren’t many key releases ahead of the meeting. ECB President Lagarde has said that all options are open and investors will be listening to any comments coming out of the ECB, looking for clues as to whether the ECB will raise rates next month or take a pause.

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EUR/USD Technical

• EUR/USD tested resistance at 1.0893 earlier. Above, there is resistance at 1.0940
• There is support at 1.0825 and 1.0778

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