Euro-zone inflation preview: Dismal figure already priced in – but EUR/USD unlikely to recover

Euro-zone inflation is going to come out below expectations. Refraining from making a clear affirmation about a future event is unnecessary for this figure as preliminary data for Spain, France, and Germany all missed early estimates.

Europe's largest economy saw the Harmonized Index of Consumer Prices (HICP) rising by only 0.9% in September – below 1% expected. EUR/USD lost 1.09 in response – falling to the lowest levels since 2017. An all-European figure of 0.9% instead of 1% that appears on the calendar is highly likely. 

EUR/USD reaction

The country-level figures are also taken into account by investors. If the headline Consumer Price Index (CPI) rises by 1% – as the economic calendar shows – it will probably be deemed as a positive surprise, and the euro could rise.

An increase of 0.9% would probably be shrugged off as an "as expected" figure, and may even trigger a "buy the rumor, sell the fact" reaction – an increase in the euro as the data could have been worse.

It would probably take a slowdown to 0.8% to push the common currency lower. The European Central Bank officially targets headline inflation and aims to reach "2% or close" inflation – missing its objective for years.

What country-level figures have not revealed is core inflation. CPI that excluded volatile items such as energy prices has also been subdued as well, standing at 0.9% in August. Expectations stand at 1% for September. As this figure has disappointed in the past, another shortfall cannot be ruled out. A no-changed number of 0.9% would also be in line with figures seen in the recent past, as the chart shows.

It would take a rise to 1.1% or more in Core CPI could push the euro higher if CPI does not fall below 0.9%. A slowdown to 0.8% also falls within the latest range – and would weigh on the euro.

After the dust settles

Even if EUR/USD advances on a "buy the rumor, sell the fact" reaction, the recovery will likely be short-lived. The general trend in the world's most popular currency pair – and the euro-zone economies – is down.

Germany is on the verge of recession, the Brexit and US-Sino trade wars pose more uncertainty – and the European Central Bank is open to adding even more stimulus. The recent resignation of Sabine Lautenschläger – the hawkish German member of the bank – opens the door to more dovish influences. 

Conclusion

Headline euro-zone inflation is set to miss expectations after country-level data disappointed while Core CPI may surprise – but not necessarily to the upside. EUR/USD may rise on a "buy the rumor, sell the fact" reaction, but any advance will likely be short-lived given the gloomy economic situation in the euro-zone.