Eurozone inflation data will be a key release
Daily Currency Update
Eurozone inflation has entered a new phase which could stay for some time, requiring the ECB to keep policy tight and avoid declaring an end to rate hikes, President Christine Lagarde said on day two of the ECB Forum on Central Banking, in Sintra, on Tuesday.Lagarde emphasized, “we are committed to reaching inflation goal come what may.”
It was Lagarde's first public speech following the weak business PMI and IFO sentiment data which aggravated concerns about the health of the bloc's economy. Germany’s 2-year and 10-year bond yield curve inverted the most in nearly 31 years on the downbeat economic data. Money markets are pricing around a 4% peak in the ECB deposit rate, predicting the European Central Bank interest rate cuts after they reach their peak.
Eurozone inflation data is released at 10am which will be a key indicator on the upcoming rate hikes from the ECB.
Key Movers
A stronger inflation print would certainly further increase pricing of a 25 bps hike on 26th July although with NFP next week, we would not expect a substantial shift in rate hike expectations. The market is currently priced at about an 85% probability of a 25 bps hike – so there is limited further scope for yields from here in pricing fully a 25 bps hike next month. The FX fallout will likely also be limited given the German inflation data yesterday saw the harmonised rate rebound from 6.3% YoY to 6.8%.The US Dollar advanced yesterday and has stabilised today. For the Fed, the PCE inflation data today will be one key piece of info.
There is little on the UK calendar today, so strong US data could briefly tip GBP/USD back to the 1.2550 area, where we expect it to find support.
Expected Ranges
- GBP/USD: 1.2590 - 1.2660 ▼
- GBP/EUR: 1.1605 - 1.1650 ▲
- GBP/AUD: 1.9055 - 1.9105 ▼
- EUR/USD: 1.0830 - 1.0870 ▼