Inflation Estimates Builds Case for Hawkish ECB

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While investors and traders alike eagerly anticipate the September monetary policy meeting, economic data from the Eurozone continues to show steady progress. This, in turn, is likely to put pressure on the European Central bank officials.

At the last monetary policy meeting in August, ECB officials said that while the current pace of QE will run its course, the central bank would discuss at some point about scaling back the QE purchases.

The ECB currently purchases 60 billion euro in sovereign bonds and corporate bonds. The last taper to the QE was a reduction of 20 billion euro. Despite sending subtle hawkish signs, the ECB maintained a cautious tone noting that a premature exit to QE would be disastrous.

Officials also remained tight-lipped on inflation so far noting that there needs to be further evidence of inflationary pressures taking ground.

Eurozone core inflation inches higher

The flash estimates from the Eurostat office released last week brought some cheer to the ECB hawks. According to official data, headline consumer prices remained steady at 1.3% for the month of July. In June, consumer prices rose 1.3% as well.

Core inflation, which strips the volatile food and energy prices showed a modest improvement. According to flash estimates, core inflation rate rose to 1.2% in July, following a 1.1% increase in the previous month.

Eurozone flash inflation estimates for July 2017
Eurozone flash inflation estimates for July 2017

Although both measures of inflation remain well below the ECB’s 2% target rate, the expectations that the central bank will cut back on QE remains high.

The Eurostat data showed that energy prices were once again responsible for pushing prices higher. In July, energy prices rose 2.2% compared to 1.9% in June. This was supposed to be the highest annual rate in energy prices.

Services also rose 1.5% during the month, slightly down from 1.6% increase registered last month. Meanwhile, food, alcohol and tobacco prices remained steady at 1.4%.

The all-items HICP was registered at 1.3%.

Eurozone unemployment rate at 9.1%

In a separate report, unemployment data in the eurozone fell 9.1% on the month in June. This was following a downward revised 9.2% unemployment rate registered in May.

Germany and Malta led the 19-nation eurozone with the lowest unemployment rate of 3.8% and 4.1%. Greece was the tail end, registering an unemployment rate of 21.7%. This was followed by Spain’s 17.1% unemployment rate. This was seen to be a better figure as Spanish unemployment rate was seen at 19.9% just a year ago.

With the broadly better than expected economic data, investors are likely to anticipate the ECB announcing another round of tapering to its QE program.

Any such policy decisions will likely come into force only from January 2018 when the ECB’s current QE purchases end.

The data was, however, cheered by traders as they pushed the EURUSD above $1.1800 handle. The session highs marked a fresh two and a half year high in the common currency. Besides the optimistic data from the eurozone, uncertainty from the United States helped as well.

Just last week, Trump fired his communications director Anthony Scaramucci just 10-days after getting him on board. Meanwhile, with the US Federal Reserve staying mute on further rate hikes due to weak inflation growth, investors have drastically cut back their bets for another rate hike this year.

The Fed, for its part, is however expected to begin its balance sheet normalization which could be announced in September. The markets so far haven’t shown much enthusiasm as the balance sheet normalization in itself is expected to be a form of policy tightening.

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