EURCHF has extended its 0.9551 rebound this week to 0.9775. The gains follow the release of German Consumer Price Index data showing that annual consumer price inflation hit 7.9% for August, higher than market expectations for a decline of one percentage point. The monthly CPI figures and the Harmonized Index of Consumer Prices or HICP (monthly and yearly) all remained unchanged, indicating that the European Central Bank’s (ECB) earlier rate hike did not dampen consumer price gains. The data is preliminary, with the final results to be published on September 13. However, it remains close to 50-year highs.
German inflation data pushed the 10-year bond yields to a 2-month high and strengthened the euro rate differential. The EUR found support from falling nat-gas prices which eased concerns about the energy crisis, after European nat-gas prices fell more than -7% on Tuesday to a 1-week low.
With energy prices 25% higher in August 2022 than a year earlier, the ECB has limited room to raise interest rates when it meets next week to decide the direction of Eurozone monetary policy. However, ECB Chief Economist Lane said the ECB needed a “steady pace” of raising interest rates in the fight against record inflation to minimize negative consequences, while ECB Governing Council Member Vasle said “we haven’t seen the highest inflation figures in the Eurozone yet,” and that he expected inflation to be high until it peaks in the next quarter before easing in the first half of 2023. Kazaks, said a significant rate hike is needed in September. He argued that the ECB should be “open to discussing possible 50bp and 75bp moves.”
Eurozone HICP inflation hit 9.1% y/y in the preliminary reading for August. Another higher than anticipated number and yet another record high. More importantly perhaps, core inflation jumped to 4.3% y/y, which is adding to warnings that inflation is becoming more broad based. Inflation differentials are also drifting apart and with headline rates running far over 20% in some countries, it won’t be enough to bring inflation down to prevent broader based knock on effects, as the erosion of real disposable income and the rise in cost pressures is too much to absorb lastingly. The numbers will give the hawks sufficient ammunition to force a debate of a 75 bp hike next week, which will put pressure on the dovish camp to at least back another 50 bp hike.
Technical Overview
The EURCHF pair attempted to bounce off its lows and in Tuesday’s trading a break of the 0.9700 resistance lifted the price close to the 0.9800 resistance. The intraday bias tends to the upside in the short term, while a move above 0.9800 opens doors for another test of 1.0000 parity.
Meanwhile a move below 0.9700 will confuse the outlook and the price will return to neutral. As long as the 0.9551 support holds, the price move could test the 50% and 61.8% retracement levels at 1.0031 and 1.0142, respectively. Broadly speaking, the pair is still in bears’ control, a price swing is possible if in the medium term, a rebound can overcome the resistance level of 1.0513 (June high price).
Meanwhile, the EURGBP pair extended its August gains by recouping losses incurred in July. The pair continues its rally for the 3rd day since Friday with Tuesday’s trading gaining +0.67% and trading in the 0.8590 price range.
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Ady Phangestu
Market Analyst – HF Educational Office – Indonesia
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