Eurozone Inflation Preview: EUR/USD has room to rise if Core CPI tops 1% amid positive bias

Giving the Germans reasons to be worried – that would be welcome news for euro bulls. Economists at Europe's largest economy tend to fear the specter of rising prices – with pictures of wheelbarrows full of worthless cash in the ill-fated Weimar Republic coming to mind. In recent years, the European Central Bank found itself fighting the danger of deflation – not inflation. 

The coronavirus crisis sent the headline Consumer Price Index close to zero amid a fall in demand. Isabel Schnabel, a German member of the European Central Bank, even said that CPI may dip below 0%. However, that is almost impossible for June. Early figures from her country and from Spain both came out above expectations.

That makes the current expectation for 0.1% YoY CPI obsolete.

Core matters

The focus for the upcoming release – and for the ECB in recent years – is therefore on Core CPI. Germany and Spain did not publish underlying inflation figures, which are projected to hold at 0.9%. The increase in headline raises the chances for a run above 1%. 

That would still be far from the bank's "2% or close to 2%" target – but would be welcome by the Frankfurt-based institution and by EUR/USD buyers. It would reduce the chances for a rate cut by the ECB – whose deposit rate is already at -0.50%. 

What about Quantitative Easing? In any case, Christine Lagarde, President of the European Central Bank, said that the Pandemic Emergency Purchase Program – already worth €1.35 trillion – is essential to prevent deflation. It will likely remain unchanged until the crisis ends.

Any increase above 1% would, therefore, boost the common currency, and now has higher chances of happening. A disappointing rise of 0.8% yearly or less would weigh on the euro.

What would happen if Core CPI meets economists' expectations with 0.9%? In that case, EUR/USD may still edge higher. 

EUR/USD positive bias

The common currency is benefiting from having COVID-19 under control – in comparison to the US and the UK. The euro seems to weather any dollar strength better than its peers. Is the euro also turning into a safe-haven currency?

That temporarily happened in 2015 around the Greek crisis and still requires more proof in 2020. Nevertheless, at least for the inflation report, EUR/USD has room to rise.

Conclusion

Eurozone CPI will likely exceed original estimates and rise more than 0.1%, leaving the focus on Core CPI. An increase beyond 1% would boost the euro, which benefits from a positive bias.