Euro Zone Inflation Eases, ECB Contemplates Rate Hike Pause Amid Uncertain Outlook

Euro zone inflation declined further in July, with most measures of underlying price growth also easing. This development provides some comfort to the European Central Bank (ECB) as it contemplates the end of its aggressive interest rate hikes.

Consumer prices rose by 5.3% in July compared to 5.5% in June, showing a downward trend since autumn. Excluding energy and unprocessed food, prices increased by 6.6% after a 6.8% rise in the previous month. Though this is still far from the ECB's 2% target, policymakers may argue that inflation is on a gentle downward path, giving them room to delay further interest rate hikes.

Services prices stood out by accelerating to a 5.6% annual increase in July, likely due to nominal wage growth and increased spending on travel and entertainment post-COVID-19. However, stubbornly high inflation in services and a new acceleration in food prices at 9.2% might strengthen the concerns of policy hawks at the ECB who fear entrenched high price growth.

Manufacturing activity across the euro zone contracted in July at the fastest pace since the COVID-19 outbreak, despite factories cutting their prices. Germany, France, and Italy all recorded marked deteriorations in demand since June.

The overall euro zone returned to growth in the second quarter of 2023, with GDP expanding by 0.3%, exceeding expectations. France and Spain experienced sustained growth, while Germany saw no growth, and Italy suffered a contraction. However, the outlook for the bloc remains uncertain due to declining economic sentiment, stagnating activity levels, and recession risks.

In Germany, exports stagnated in June, and the property sector is under stress, leading to insolvencies and plunging share prices for landlords. On the bright side, German unemployment unexpectedly declined in July, showing resilience in the labor market despite difficult economic conditions.

Euro zone economic sentiment declined for the third consecutive month in July, with concerns about a potential recession rising. The European Central Bank raised interest rates for the ninth time but might consider a pause in September due to easing inflation pressures and recession worries.

As for the U.S., the dollar reached a four-week high against major currencies despite a credit rating downgrade by Fitch. Strong private payrolls data supported the dollar, indicating continued labor market strength. While the ratings cut may raise concerns about the U.S. fiscal position and global standing of the dollar, the strong economic data has calmed fears of a recession. As a result, it is anticipated that the euro will remain relatively stable against the dollar, possibly showing a slight weakness, throughout this timeframe.

Data for Technical Analysis (5H) CFD EUR/USD

Resistance : 1.0961, 1.0965, 1.0971

Support : 1.0949, 1.0945, 1.0939        

5H Outlook

Source: Investing.com                     

Buy/Long 1 If the support at the price range 1.0939 - 1.0949 is touched, but the support at 1.0949 cannot be broken, the TP may be set around 1.0964 and the SL around 1.0934, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.0961 - 1.0971, TP may be set around 1.0980 and SL around 1.0944, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.0961 - 1.0971 is touched, but the resistance at 1.0961 cannot be broken, the TP may be set around 1.0948 and the SL around 1.0976, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.0939 - 1.0949, TP may be set around 1.0932 and SL around 1.0966, or up to the risk appetite.       

Pivot Points Aug 04, 2023 03:56AM GMT

Sources: Investing 1, Investing 2