Inflation in the eurozone is breaking records again. The published inflation indicators came out in the green zone, exceeding the rather bold forecasts of most experts. And although only preliminary data for October were released on Monday, it is safe to state the fact that the European Central Bank was unable to curb inflation. The flywheel of inflationary growth continues to unwind despite the hawkish decisions of the ECB.
It is noteworthy that EUR/USD traders reacted to the latest report in a seemingly illogical way: the pair impulsively declined to the base of the 99th figure. Despite the fact that in the other (main) cross-pairs with the participation of the euro, the single currency strengthened its position. This suggests that EUR/USD traders are completely focused on the greenback's behavior, while ignoring even such important releases.
The US dollar index is growing ahead of the Federal Reserve's November meeting (the results of which will be announced on Wednesday), and this fact is decisive for EUR/USD. The Fed retains the intrigue: experts are still holding a discussion in absentia about the prospects (pace) of tightening monetary policy after the November meeting. This information background has shifted the focus of attention from European events. At the moment, dollar pairs are waiting for the Fed's verdict.
And yet, in my opinion, the latest report will still manifest itself – at least in the context of the December ECB meeting. Let me remind you that following the October meeting, ECB President Christine Lagarde said that a 75-point step in raising rates "is not the norm", and the next round of hikes "will not necessarily be by 75 basis points." But at the same time, she reiterated the thesis that the pace of rate hikes will be determined from meeting to meeting "depending on incoming statistical data."
According to the latest report, the general consumer price index in October jumped again, reaching 10.7% (in September it was at the level of 9.9%). This is another historical record, that is, the highest value of the indicator for the entire history of observations (since 1997). The result was higher than the forecasts of most experts: analysts polled by Reuters expected that the index would only slightly exceed the September level, reaching 10.1%. The core consumer price index (excluding volatile energy and food prices) also showed strong dynamics, rising to a 5% mark.
Analyzing the structure of the release, we can conclude that in October the prices for energy and food increased the most (in fact, as in the last month). Thus, the cost of energy resources soared by almost 42% (in September, an increase of 40.7% was recorded). Food, alcohol and tobacco rose in price by 13% (in September – by almost 12%), industrial goods – by 6%, services – by 4.4%. According to the EU Statistical Office, the strongest rate of inflation growth was recorded in the Baltic States: Estonia (22.2%), Lithuania (22%) and Latvia (21.8%). Relatively weak price growth – in France (7.1%), Spain (7.3%), Finland (8.3%) and Cyprus (8.6%).
It is also necessary to recall here that the European economy increased slightly in the third quarter (contrary to more pessimistic forecasts): the GDP of the European group countries for the period from July to September increased by 0.2% compared to the second quarter. The German economy, which is the locomotive of the European economy, grew by 0.3% in the third quarter of the year, despite experts' forecasts for a 0.2% reduction in GDP.
In other words, the current situation hypothetically allows the ECB to raise interest rates by 75 points in December. Given the fact that this issue is not resolved, any relevant hints of a hawkish nature on the part of ECB members will strengthen the euro's position.
But the thoughts of EUR/USD traders are on the other side of the ocean. The dynamics of the pair will depend on the Fed's November verdict. If the US central bank maintains its hawkish attitude (at least in the context of the December meeting), the dollar will strengthen its position throughout the market, and the euro will not be able to restrain the onslaught of dollar bulls. The probability of a 75-point rate hike at the December meeting is now only 46%. If the dovish rumors (about a slowdown in the Fed's rate hike in December and beyond) are confirmed, the euro will become the beneficiary of the current situation. After all, in this case, the ECB will raise rates by 75 basis points in December, and the Fed – by 50 points. This fact (regardless of all other circumstances), in itself will play on the side of the single currency.
Thus, the market actually ignored the latest inflation report. EUR/USD traders have followed and are following the US dollar index, which showed positive dynamics on Monday. However, European inflation may still assert itself under certain circumstances – especially if the Fed loosens its grip on the results of the November meeting. In conditions of such uncertainty, it is most expedient to take a wait-and-see attitude for the EUR/USD pair now.
