Eurozone inflation was confirmed at 2.6% year-on-year in July, up from 2.5% in June. The rise in inflation, combined with expectations of an interest rate cut by the Federal Reserve, has pushed the euro to a nine-month high against the US dollar.
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Euro zone inflation rose to 2.6% in July, up slightly from 2.5% in June, in line with provisional data from Eurostat and above the 2.4% forecast by economists earlier.
The rise clouded hopes of a swift interest rate cut by the European Central Bank and sent the euro rising to its highest level against the dollar since late December 2023.
Core inflation, which excludes volatile energy and food prices, stabilized at 2.9%, highlighting underlying price pressures well above the central bank’s 2% target.
Inflation in the service sector remains high
In July 2024, the main contributor to euro area annual inflation was services (1.82 percentage points), followed by food, alcohol and tobacco (0.45 percentage points), non-energy industrial products (0.19 percentage points) and energy (0.12 percentage points).
Services inflation, which accounts for about 45% of the CPI, was 4%, down slightly from 4.1% in the previous reading. The lowest inflation rate among consumer goods was in non-energy manufactured goods, which increased just 0.7% annually.
Among euro area member states, Finland (0.5%), Latvia (0.8%) and Denmark (1.0%) had the lowest annual inflation rates, while Romania (5.8%), Belgium (5.4%) and Hungary (4.1%) had the highest rates.
In Germany, consumer prices rose by 2.6% compared to July 2023, up slightly from 2.5% the previous month. Meanwhile, inflation slowed in Spain and Portugal, with Spain’s unified inflation rate falling from 3.6% to 2.9% and Portugal’s from 3.1% to 2.7%.
Meanwhile, the European Central Bank said on Tuesday that the euro zone’s current account posted a surplus of 51 billion euros in June 2024, up from 38 billion euros the previous month and a record high.
The surplus is expected to reach €370 billion (2.5% of euro area GDP) in the 12 months to June 2024, up from €30 billion (0.2%) the previous year.
Market reaction
The euro held firm against the U.S. dollar at 1.1080, its highest since late December. It has risen in five of the past six sessions as hopes grew that the Federal Reserve may soon signal its intention to start cutting interest rates.
“The crux of the story is whether EUR/USD will break out of its 18 month trading range which has mainly contained EUR/USD in the 1.05 to 1.11 range. FX options markets are suggesting an uptrend is in the cards for at least the next month,” commented Chris Turner, global head of markets at ING Group.
“The decline in oil prices on the back of a possible Middle East peace deal is good news for EUR/USD,” Turner added.
“The euro continues to benefit from the general weakness of the US dollar, which has been unable to counter the recent negative sentiment,” said Luca Cigognini, market strategist at Intesa Sanpaolo.
Cigognini stressed that the market will be closely watching the Jackson Hole symposium, particularly a speech by Federal Reserve Chairman Jerome Powell, which could support the view that a rate cut will come in September and possibly even further by the end of the year.
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Danske Bank bearish on euro
Meanwhile, Danske Bank Research maintains its bearish view on the euro and predicts a strengthening US dollar as the market may be overestimating the likelihood of a Fed rate cut.
“We expect EUR/USD to weaken going forward. We do not believe the structural strength of the US economy justifies this large rate cut and the US dollar should remain supported,” the bank said.
European stocks rose modestly on Tuesday, with the Euro Stoxx 50 index up 0.2 percent and on track for its sixth consecutive positive close, its longest streak since May.
European stocks have fully recovered from selling pressure earlier in the month caused by fears of a US recession and a strengthening yen due to hawkish interest rate hikes by the Bank of Japan.
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Among the euro zone’s top gainers were ASML Holdings NV, up 2.3%, and Spanish retailer Inditex, up 1.3%. Among decliners, Bayer slid 2.6% and Telefonica fell 1.3%.
