Eurozone's CPI Numbers Show Optimism But Investors Should Be Cautious
Inflation is on the minds` of many traders and investors, and every print of the inflation reading is closely watched by them. Today, we had another inflation reading from the Eurozone, which has made many investors and traders a lot more comfortable with their current view as they continue to think that the bets that they have placed are in the right direction.
Today we received the Eurozone’s inflation data, which matched expectations and printed a reading of 2.4%. If you look at things from a higher level, investors and traders are pleased to see this reading as the number for the Eurzone’s CPI data hasn’t changed—the forecast was for 2.4%, and the previous number was also at 2.4%. The reading also confirmed to them that the European Central Bank is much closer to achieving its target level of 2% for inflation. In fact, among the developed countries, especially the UK and the US, it is the ECB that sits in the most comfortable position, as it can easily be said that it has the most leverage in terms of lowering the interest rate.
However, the devil is always in the details, and this is what traders must pay attention to when they look at investment ideas. For instance, if we look at the core CPI inflation data for the Eurozone, you will see clearly that this number has actually ticked higher. The number came in at 2.7%; the forecast is for 2.4%, while the previous number was at 2.9%. So on one hand, the number came higher than the forecast, which is not so much good news for the ECB, but at the same time, the ECB can take comfort in the fact that the number was actually lower than the previous reading. So overall, there are two messages here: one that the ECB should feel comfortable reducing the rate as the Core CPI number has been much lower than the previous reading. The other message is that the ECB should not be overly enthusiastic about the current performance of the Core CPI, as the number was higher than expectations, and secondly, and more importantly, the headline inflation number has remained the same. A caution should be exercised with any overlydovish approach.
In terms of the price action, there is one clear trend for the EUR/USD, which is to the downside. This is mainly because the price continues to trade below the 50- and 100-day SMA, which confirms that there are more bears in the market. This also falls in line with the fundamental view that we talked about above, as if the ECB is going to push the button on the interest rate first and pull the rates lower, the Euro will become a weaker currency because of the lower interest rate. Remember, dovish monetary policy pulls the currency to the downside. So, in terms of the price, it is likely that we may see the price moving further to the downside and touching the levels near the green line, which shows support. On the flip side, if we do see some change in the stance, we could be looking at the price touching its resistance line.
On the date of publication, Naeem Aslam did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
