EU and US Inflation to Set EURUSD Rate Friday

Friday is inflation day for the world's two largest economies, with analysts expecting price rises to continue to slow. But will it be enough to deter more hikes?

The ECB Still Talks Tough

Despite the recent decision by the ECB to pause for an indeterminate amount of time, the shared central bank doesn't want to leave the impression it is going soft. Before the release of major inflation data later this week, ECB President Christine Lagarde stuck to her "high for long" rhetoric. Inflation is still well above target and is expected to remain high despite the continent facing stagnation and concerns it could slip into a technical recession led by Germany. There are also renewed worries that inflation pressure could pick up as the prices of fuel rise and summer retail discounts come to an end.

All eyes will be on Germany, the first of the big economies to report ahead of the Eurozone number. German headline inflation is expected to crater to 4.9% from 6.1% prior, which could help justify the ECB's reluctance to raise rates even further into record territory. However, some of the elements that have helped keep inflation comparatively lower in other parts of Europe are ending, such as subsidies for public transportation and energy. French inflation is expected to tick up to 5.1% from 4.9% prior. Still, the overall Eurozone headline inflation rate is expected to fall to 4.7% from 5.2% prior. But the core rate is seen as acting slower, with the consensus forecast for September core CPI at 5.0% compared to 5.3% prior.

US Inflation Still in the Balance

Despite the last FOMC meeting, where they kept rates steady, the market and the Fed are still at odds over the outlook for monetary policy. The Fed still says there will likely be another rate hike this year, while the market says that's unlikely. Still, Treasury yields have a 16-year high as investors are still wary of more tightening, the issues around the budget discussions, and how the Federal government will manage to roll over $7.6T in debt (on top of financing new appropriations) over the next 12 months.

The Fed's preferred measure for inflation will be published on Friday, with the Core PCE Price Index once again expected to show a monthly growth of 0.2%. But, thanks to base effects, the annual rate is expected to keep coming down to 3.8% from 4.2% prior. Without a major change in the PCE trajectory, the status quo on rate hike projections is likely to remain stable. Another data piece to be released simultaneously that could give some insight into the longevity of economic growth is personal spending and personal income. Personal spending is expected to grow at triple the rate of income, at 0.6% compared to 0.3% respectively.This follows a US credit card debt record of $1.0T, as Americans increasingly borrowed to keep up with inflation, which could mean high interest rates could further squeeze consumer demand.

Triple Bottom Near $1.05 May Offer Respite

EUR/USD There's a triple bottom at play on EUR/USD around $1.05, and if the round support is lost, it will open the door to $1.04 wide open. Below there lies the golden pocket at $1.02, which happens to be a swing resistance. A rebound could see a revisit of the 38.2% Fibonacci past $1.0610, with a break past $1.0633 alone exposing $1.077. The pair appears to be in a longer-term correction, ending up being a potential flag.

Source: SpreadEx / EURUSD

Key Takeaways

Analysts expect inflation prices to continue slowing down on Friday in both the EU and US. The ECB remains cautious despite pausing rate hikes, emphasising that inflation is still above target and expected to remain high. The focus will be on Germany's inflation numbers, which are expected to decrease and could support the ECB's reluctance to raise rates further. In the US, there is a divergence between the Fed and the market on monetary policy. The Fed predicts another hike, but the market disagrees. The bank's preferred measure of inflation, Core PCE, is expected to show a monthly growth rate of 0.2%, with an annual rate decline. Personal spending and income data will also provide insights into economic growth.