The Eurozone CPI Year-over-Year (YoY) report was the main focus of the day, showing a mixed outcome. The headline CPI number decreased to 2.5% as expected, while the core CPI remained unchanged. Despite this, the Euro did not see a positive impact, with the EUR/USD pair continuing to decline and attempting to break below 1.07.
Before the release, it was anticipated that the headline CPI would dip slightly to 2.5% in June from 2.6% in May, which it did. The Core CPI YoY was expected to decrease to 2.8% but remained steady at 2.9%. However, these adjustments were not projected to have a major impact on the European Central Bank’s (ECB) plans. The ECB aims to assess the data over the summer before making decisions on potential interest rate cuts in September, which is what transpired today.
If inflation declines rapidly or the economy worsens significantly during the summer, the market may start pricing in additional rate cuts before the end of the year. Prior to the report, the market had factored in 46 basis points of easing by year-end, with a 61% chance of no change at the July meeting and an 83% probability of a rate cut in September. Following the inflation report, these probabilities have shifted.
After facing a decline post the European Parliamentary elections, the EUR/USD pair found support around the 1.0700 level. It opened higher yesterday due to right-wing party gains in France and Macron’s alliance slipping to third place. However, it encountered resistance at the 200 SMA (purple) and retraced lower following disappointing CPI inflation readings from Germany, which foreshadowed the Eurozone June CPI report.
The Eurozone’s preliminary CPI for June showed a year-on-year increase of +2.5%, in line with expectations but slightly lower than the previous month’s +2.6%. Core CPI stood at +2.9% year-on-year, slightly above the expected +2.8% and unchanged from May. ECB’s Philip Lane attempted to downplay the report’s significance, but the details are not particularly positive for the central bank. While headline inflation eased as predicted, core inflation remains high, mainly due to elevated services inflation at 4.1%.
In conclusion, the Eurozone CPI report for June revealed a mixed outcome, with headline inflation meeting expectations but core inflation remaining stubbornly high. The market is closely monitoring these developments as they could influence future ECB decisions regarding interest rates.