Eurozone Preliminary HICP inflation holds steady at 5.3% YoY in August vs. 5.1% forecast

The annual Eurozone Harmonised Index of Consumer Prices (HICP) rose 5.3% in August, at the same pace as seen in July, the official data released by Eurostat showed on Thursday. The HICP inflation gauge beat expectations for a 5.1% growth.

The Core HICP inflation edged lower to 5.3% YoY in August, as against July’s 5.5% clip. Markets had anticipated 5.3% figure.

On a monthly basis, the old continent’s HICP jumps 0.6% in August vs. a 0.1% drop in July and -0.1% expected. The core HICP inflation rebounded to 0.3% in the reported period when compared with 0.3% expected and -0.1% recorded in July.

It’s worth mentioning that the European Central Bank’s (ECB) inflation target is 2.0%.

The bloc’s HICP figures have a significant influence on the market’s pricing of the ECB interest rate outlook. Markets are currently pricing a 30% probability of a 25 basis points (bps) ECB rate increase to 4.0% in September.

Key details (via Eurostat)

“Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in August (9.8%, compared with 10.8% in July), followed by services (5.5%, compared with 5.6% in July), non-energy industrial goods (4.8%, compared with 5.0% in July) and energy (-3.3%, compared with -6.1% in July).”

EUR/USD reaction

The shared currency is falling further on the mixed Eurozone inflation data. EUR/USD is trading at 1.0865, down 0.54% on the day, as of writing.

15-minutes chart

Euro price today

The table below shows the percentage change of Euro (EUR) against listed major currencies today. Euro was the strongest against the Swiss Franc.

USD   0.58% 0.17% 0.09% 0.13% -0.14% 0.04% 0.33%
EUR -0.52%   -0.34% -0.42% -0.39% -0.66% -0.45% -0.19%
GBP -0.16% 0.40%   -0.07% -0.03% -0.32% -0.11% 0.17%
CAD -0.09% 0.41% 0.08%   0.05% -0.24% -0.04% 0.24%
AUD -0.13% 0.44% 0.04% -0.04%   -0.27% -0.07% 0.20%
JPY 0.16% 0.73% 0.28% 0.23% 0.30%   0.22% 0.47%
NZD -0.01% 0.52% 0.12% 0.04% 0.08% -0.19%   0.28%
CHF -0.33% 0.24% -0.16% -0.24% -0.20% -0.48% -0.28%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

The section below was published at 05:00 GMT as a preview of the European inflation report.

  • Eurostat will publish the high-impact Eurozone inflation data on Thursday, August 31.
  • Headline HICP is set to fall to 5.1% YoY, Core figure to decline to 5.3% in August.
  • Eurozone inflation data holds the key for the ECB’s next policy move, rocking the Euro.

“The fight against inflation is not yet won,” European Central Bank (ECB) President Christine Lagarde said at an annual conference of central bankers in Jackson Hole last Friday.

Lagarde added that interest rates in the European Union will need to stay high “as long as necessary” to slow still-high inflation. Therefore, the upcoming Eurozone inflation data will hold the utmost significance in determining the next interest rate move by the ECB.  

Money markets are pricing a 51% probability of an ECB rate hike pause at the September meeting. Bloomberg’s world interest rate probabilities (WIRP) suggest odds of a 25 basis points (bps) hike stand near 35% for next month, at 50% for October 26 and top out near 70% for the December 14 meeting.  

What to expect in the next European inflation report?

Eurostat will release the preliminary estimate of the Eurozone Harmonized Index of Consumer Prices (HICP) on Thursday, August 31.

The annual Core HICP inflation, the gauge closely watched by the European Central Bank, is seen dropping to 5.3% in August from 5.5% in July. The headline Eurozone Harmonized Index of Consumer Prices is expected to rise 5.1% YoY in August, a slight slowdown from July’s increase of 5.3%.

On a monthly basis, the old continent’s HICP is likely to decline 0.1% in August. The core HICP inflation is foreseen at 0.3% in the reported month when compared to July’s decline of 0.1%.

Inflation in over 20 countries that use the Euro has dropped from a peak of 10.6% last year to 5.3% last month, largely reflecting sharp declines in energy prices. But inflation still remains more than double the ECB’s 2.0% target.

Previewing the August inflation data, TD Securities explains: “While continued soft momentum in food and core goods inflation should put further downside pressure on inflation in Germany and the EZ, the recent surge in oil prices will keep headline inflation from falling much. Services inflation is still key for the ECB though, and here we see another strong m/m print, though base effects should push the y/y rate down a touch.”

Dovish ECB expectations gained traction after activity in the bloc's dominant services industry contracted for the first time this year and the downturn in the manufacturing sector continued, according to the PMI survey’s data. The Eurozone HCOB Manufacturing Purchasing Managers Index (PMI) rose to 43.7 in August when compared to the market forecasts of 42.6 and above the 42.7 seen in July. The index hit a three-month high. However, the Services PMI declined to 48.3 in August from 50.9 in July, hitting a 30-month low and way below the 50.5 estimates.

The European Central Bank remains committed to bringing inflation back to its 2.0% target without causing a recession, which puts the central bank in a tough spot on the interest rate outlook.

As usual, some member states have already published their national inflation figures for August, providing clues over the direction of the whole Eurozone HICP data.

Spain's Consumer Price Index (CPI) rose 2.6% YoY in July, courtesy of higher fuel prices, preliminary data from the National Statistics Institute (INE) showed on Wednesday. The harmonized annual inflation rate climbed to 2.6%, as against the June figure of 2.3% while matching the expected 2.6% figure.

Germany’s headline annual HICP rose 6.4% in August, compared with the 6.5% previous month’s increase and the 6.2% forecast for August. 

Since the annual inflation in Germany and Spain barely slowed in August as against expectations, it raises the stakes for an upside surprise in the Eurozone inflation data.

When will the Harmonised Index of Consumer Prices report be released and how could it affect EUR/USD?

Eurozone preliminary HICP is slated for release at 09:00 GMT on Thursday. In the lead-up to the Eurozone inflation showdown, the Euro (EUR) is ranging close to the 1.0800 round level against the US Dollar, as investors prefer to remain on the sidelines. Additionally, the latest hawkish remarks by the US Federal Reserve (Fed) Chairman Jerome Powell at the Jackson Hole Symposium have revived expectations of one more Fed rate hike in 2023, keeping the US Dollar afloat.

A hotter-than-expected headline and core HICP inflation data could reinforce expectations for a September ECB rate hike. In such a scenario, EUR/USD could extend its recovery toward the psychological level of 1.1000. However, if the bloc’s inflation declines at a faster pace than expected, the main currency pair is likely to test the downside near 1.0700.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “EUR/USD failed to find acceptance above the horizontal 100-Daily Moving Average (DMA) at 1.0925 on a daily closing basis on Wednesday. However, the 14-day Relative Strength Index (RSI) is defending the 50 level, as we head close to the Eurozone inflation data release.”

Dhwani also outlines important technical levels to trade the EUR/USD pair: “Further upside needs validation from the 100 DMA resistance, as Euro bulls look to target the 50 DMA at 1.0971 en-route the 1.1000 level. Alternatively, strong support aligns at the previous day’s low of 1.0855, below which the downside will open up toward the mildly bullish 200 DMA at 1.0814.” 

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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