Inflation data will close the month, quarter and half-year - how can the euro exchange rate react?

Hopes for easing inflationary pressure are focused on inflation data, which in the second half of the week will be of key importance for central banks and markets. Europe awaits the release of preliminary CPI data for June 2023, and the US will watch the PCE index, which is most often monitored by the Federal Reserve to measure inflation, although the data is for May 2023.

Forecasts for inflation

Forecasts indicate that inflation will continue to stay away from central banks' inflation targets. For Europe, an overall slowdown in inflation growth is expected in the major Eurozone countries, with the exception of Germany, which may see a slight rebound. Nevertheless, inflation levels are still far from those that would ensure price stability for the European Central Bank and the Fed.

This tense situation makes central bankers maintain a sharp approach in their statements, which may affect further discussions on monetary policy. In this context, the most important representatives of the central banks are expected to meet at the forum in Sintra on Wednesday. Guests will include Jerome Powell z Fed, Christine Lagarde with EBC, Andrew Bailey z Bank of England and Kazuo Ueda z Bank of Japan.

Possible market reactions to inflation data

Market reactions to the expected inflation data could be significant. If inflation turns out to be lower than forecast, it may mean that the steps taken so far to raise interest rates are bearing fruit. Such a scenario would help reduce uncertainty in the stock markets and encourage central banks to be more moderate in their statements on interest rates, which could contribute to a short-term rebound in bond prices.

On the other hand, if inflation turns out to be higher than expected, central banks may be forced to maintain a tight stance on interest rate increases. Such a scenario would potentially trigger a fall in bond prices and negatively affect equity markets.

There are some signs of a rebound in the bond market. The German Bund is rebounding from a support level close to a yearly low. Similar behavior is seen with the US 10-year bond, which bounces back moderately from an earlier low.

In the stock markets, the situation is more difficult. European indices are close to their lowest levels since May 2023. In the case of Euro 50 it is the level of 4,210 points, and for DAX is 15,626 points. In the US market, the Nasdaq 100 index retreated after reaching this year's high of 15,281 points.

Euro exchange rate and incoming data

EUR / USD exchange rate is in the region of 1,1000, i.e. at the highest level since the first half of May, after it could have been supported by growing expectations for further strong interest rate hikes in the euro zone in relation to the United States. Nevertheless, it should be remembered that data from Europe have recently surprised negatively. Citigroup's eurozone economic surprise index plummeted to -132. This is a level that has only been seen during the 2008 global financial crisis and the 19 Covid-2020 pandemic.

This may mean that with each successive rate hike, the economic situation of the euro area may deteriorate, which may threaten the prospects for economic growth and have a negative impact on the euro. However, the key level to be overcome could be only the level of 1,0820, so that the euro rate could start to fall more significantly.

Calendar of inflation data releases and expectations

Italy - Wednesday, June 28, 11:00

In Italy, preliminary consumer inflation (CPI) data for June, due for release on June 28 at 11:00 CET, could show a drop on a monthly basis from 0,3% to the expected 0,1%. The annual inflation rate could also fall from 7,6% to the expected 6,8%. If these predictions are confirmed, it would suggest that inflationary pressures in Italy may be easing somewhat.

Spain - Thursday, June 29, 09:00

In Spain, preliminary data on consumer inflation (HICP) for June, due to be released on June 29 at 09:00, could show a decline at the annual level from 2,9% to the expected 1,5%. This would be a significant drop, which would indicate that inflationary pressures in Spain are declining significantly.

Germany - Thursday, June 29, 14:00

In Germany, preliminary consumer inflation (HICP) data for June, due for release on June 29 at 14:00 CET, could show an increase on an annualized basis from 6,3% to the expected 6,7%.