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Will EuroZone Inflation Justify Another Hike By the ECB?

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Over the course of Thursday and Friday we will get the release of inflation data out of the EuroZone. With the intense debate in the ECB about the trajectory of future rate hikes, the data could be pivotal for how the Euro performs. There could also be some increased volatility as the data trickles out in bits and pieces.

The data comes out in the context of other central banks being forced to tighten policy more than expected after inflation kept rising. This month, the RBA and BOC resumed rate hikes much to the surprise of the markets. Inflation in the UK forced the BOE to do a double rate hike just last week. Investors are going to be keenly monitoring the price data from the EuroZone to see if that phenomenon will repeat in Europe.

Setting expectations

The ECB is widely expected to raise rates again at its July meeting. Where the debate lies is if there will be another hike in September or not. Hotter than expected inflation would incline the balance for another rate hike after July, or even raise the possibility of a double hike at the next meeting. But if inflation were to come in below expectations, the Periphery members might finally get wider support in their efforts to pause rate hikes following the coming meeting.

The issue for the markets is that the data comes out in staggered fashion, with Germany issuing its preliminary measure on Thursday in the middle of the markets. If the rest of the data comes in line with Europe’s largest economy, then Thursday will see the largest market reaction. But if there are discrepancies between the major countries (France reports on Friday, ahead of the data for the entire EuroZone), then there could be volatility over a longer period.

What to look out for

There is still an internal debate in the ECB over how much emphasis should be put on the core rate. Typically, central banks ignore the headline rate, since it tends to bounce around a lot. In the case of Europe in particular, the headline rate has been driven primarily by the consequences of the war in Ukraine, pushing up energy and food prices. Doves argue that the headline rate should be taken more into account, because that will spill over to the rest of the economy soon.

At the country level, only headline inflation is announced in the preliminary phase, which gives markets a little less information to judge. That can lead to some confusion in reactions, as markets try to figure out how much of an impact the headline data will affect ECB thinking, and what it could indicate for the core reading which is released last on Friday.

What the data points to

German headline inflation is expected to accelerate to 6.4% from 6.1% prior. But this could be offset the next day when French headline inflation is expected to decelerate to 4.7% from 5.1% prior. The discrepancy is seen driven by the cost of energy in the two countries.

The EuroZone Flash CPI change is expected to moderate to 5.6% from 6.1% prior. But the core rate is actually expected to accelerate to 5.4% from 5.3%, putting the ECB in a situation more similar to the BOE and BOC, than the Fed (which recently initiated a pause). The debate between the hawks and doves over how much attention to pay to the core rate is likely to be reignited, but for now the hawks seem to be firmly in the majority.

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