HICP inflation in Eurozone accelerated from 1.2% to 1.9% on a yearly basis, strongly defeating the market consensus of 1.6%. What's more, core inflation jumped from 0.7 to 1.1% y/y. Such a scenario hung in the air after yesterday's data from Germany and earlier readings, among others from France, where the annual growth rate of prices is the highest since 2012. In the result, the euro has been gaining again since yesterday, however, mainly due to the calm of sentiment on the Italian Treasury bonds market.
Less than two weeks before the planned decision on the future of the bond buying-in program (QE), the European Central Bank (ECB) faces a real challenge. On the one hand, the political crisis in Italy has raised the yields on bonds of weaker countries and calls into question the integrity of the region, which would indicate the need to maintain - at least in the short term - market support with ultra-smooth monetary policy (QE in Q4). On the other hand, inflation in the largest Eurozone economy has risen to the highest level in 6 years. According to preliminary estimates, the CPI in May amounted to 2.2%. The last result was recorded last in February and earlier in July 2013, but in both cases, it was the peak of dynamics for the next few quarters. Currently, it is unlikely that the price growth will stop at this level, taking into account the behavior of oil prices in recent months and their strong impact on the prices of consumer goods and services in general, especially in the situation when further, long-term records of low unemployment are achieved on the labor market (5.2% in May - the lowest since unification). The discrepancy within the common currency area makes monetary policy difficult, so Mario Draghi and the company will again have to face the task of proper calibration of its parameters and tools. The currently most likely scenario is still dovish, so the QE will be extended for at least another three months. However, it is not certain whether this will calm the situation in the markets and the euro-related pairs.
Let's now take a look at the EUR/JPY technical picture at the daily time frame. The fall from the swing top at the level of 137.40 has almost hit the 50% Fibo and stopped at the level of 124.57. Since then the market is trying to bounce higher and possibly test the technical resistance at the level of 129.11. Moreover, it looks like the market is currently moving inside of the parallel channel, so any breakout in either direction will be an additional important clue. The short-term bounce in EUR/JPY is being supported by the oversold market conditions, so the bias remains bullish.
