Eurozone CPI in Focus As Central Banks Address Changing Inflation Outlook At Sintra

Most of the heads of major global central banks are meeting in Sintra this week and could deliver important speeches on monetary policy outlooks, while the ECB recalibrates its inflation outlook amid declining crude prices.

The Key Points Moving the Markets

• Eurozone CPI is expected to remain elevated, which could prompt the ECB to hike again later this year.
• Focus on commentary on central bankers at the Sintra conference, as uncertainty around energy price pressures reduces forward guidance.
• A difference in economic performance could guide EURUSD as markets react differently to the ECB and Fed's expected tightening later this year.

ECB "Vigilant" As Investors Assess Inflation Outlook

Europe's equivalent of the Fed's Jackson Hole Symposium kicked off on Monday, with many major central bank heads and ECB officials expected to give speeches. The event was headlined by ECB President Christine Lagarde's overnight speech, in which she reiterated the bank's stance against providing forward guidance amid uncertainty. This echoes steps taken by new Fed Chair Kevin Warsh, as central bankers move to respond to data rather than foreshadow long-term policy. The ECB was the first of the major central banks to raise rates amid rising energy price pressures, but now that crude has returned to pre-war levels, Lagarde has turned to defending the bank's actions. She argues that the move was not "insurance" and that the ECB's projections show inflation returning to target only by late next year. Investors remain nervous about buying the euro amid weak economic performance and the potential for higher rates later in the year.

Markets are pricing in a 60% chance that the ECB will hike again in September despite the easing tensions in the Middle East. This assumes inflation will remain elevated, as crude shipping disruptions could persist for several months. On the one hand, the expectation that energy costs will eventually decline as the energy market normalises could lead markets to overlook the upcoming Eurozone flash June CPI figures, even if they exceed consensus. On the other hand, if inflation is lower than expected, it could revitalise interest in the euro, as it might mean the ECB would not go through with a second rate hike this year, and the shared economy could gain some support. On Tuesday, the French CPI fell to 1.8% from 2.4%, below the 2.1% forecast. Wednesday's Eurozone CPI is expected to ease slightly to 3.1% on the headline, down from 3.2% in May. Meanwhile, the core rate is anticipated to stay unchanged at 2.6%.

Will the EURUSD Rebound Continue?

Fibre has gained over the last week as the odds of an ECB hike have diminished, allowing the euro to rise faster than the dollar (as the market increases the odds of a Fed hike to 80% by the end of the year). After the data release, the focus will return to the ECB Forum in Sintra, Portugal, with Lagarde expected to deliver another, more policy-orientated speech. The BOE's Andrew Bailey will also deliver a speech. However, the focus will likely be on Warsh's comments, the first major speech since the last FOMC decision, as it could be an opportunity for him to clarify his outlook. The EURUSD could continue its trajectory if central bankers affirm their outlook, but comments suggesting that the recent decline in crude prices may require a policy adjustment could introduce volatility in the pair. 

EURUSD Slides Below 1.1400, But Can It Recover?

After briefly falling below 1.1400, a major round and active level where EURUSD has previously found support, bulls may next target the median VWAP near 1.1483 if 1.1430 gives way. Further upside may be limited by the descending auto-trendline currently at 1.1628. On the other hand, if 1.1420 confirms as resistance, the next support level is the local low of 1.1325, followed by the 1.1300 round level. However, the sustainability of a potential drop will also depend on the RSI reaction as it hovers above oversold territory.

Source: SpreadEx | EURUSD, Daily Chart