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Eurozone inflation data brings some relief for ECB

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By Craig Erlam  

European stocks are ending the week on a high, buoyed by another encouraging inflation report that will soon support the end of the ECB’s tightening cycle.

Not only did the headline HICP rate fall further than expected, but the slight rebound at the core level – driven largely by unfavourable base effects, largely attributed to German transport subsidies last year – was lower than expected.

ECB policymakers will not get complacent on the back of Friday’s data but with inflation expected to fall further in the months ahead, core included later in the third quarter, we could well see a pause in rate hikes before the fourth quarter. This may enable the soft landing policymakers have been hoping for, with very shallow recessions a small cost to pay for price stability. ​

The unemployment rate staying at 6.5%, as the number of unemployed fell slightly, will keep ECB hawks on edge for signs of labour market tightness driving sustained excessive wage growth, but those fears should also subside over the coming months.

A rate hike in July looks highly likely on the back of recent ECB comments, particularly those after the meeting this month, but beyond that investors aren’t convinced thinking another is more likely than not, but by no means guaranteed.

Oil remains range bound

Oil prices edged higher again Friday, but given how they’ve traded over the last couple of months I’m struggling to read too much into it. The inventory data on Wednesday was bullish on the face of it and the eurozone inflation data on Friday won’t do it any harm either, but uninspiring Chinese PMIs overnight don’t fill confidence.

Broadly speaking, it’s range-bound as it has been since early May, and showing little signs of breaking in either direction. The range is getting gradually smaller but at such a slow pace that it doesn’t really tell us much at this point.

It very much feels like traders are awaiting more information on inflation and, by extension, interest rates, and until we have a better idea of the outlook, it could remain in this pattern.

Gold struggling

Gold continues to languish around $1,900 after slipping below briefly on Thursday for the first time since March. Strong economic data from the US has reaffirmed fears that a resilient economy may stand in the way of the Fed ending the tightening cycle, increasing the possibility of more hikes and a harder landing.

There are clear signs of progress on inflation, but with the economy and labour market showing such resilience, officials may be concerned that getting from 4.4% to 2% may be much harder than what’s been achieved so far.

And the longer it remains above, the longer rates will remain high which is a big risk to the longer-term economic prospects.

Bitcoin steady after ETF surge

Bitcoin is back in the green, but remains in the $30,000-31,000 range it’s traded largely within over the last week. The ETF filings have given it some very positive momentum even with SEC lawsuits hanging over the industry.

A break above $31,000 could see it accelerate higher once more with $32,500 potentially offering the next test.

 

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.