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What September’s CPI Print May Mean For The ECB

Michael Brown
Senior Research Strategist
Sep 22, 2023
After implying that rates have now reached their terminal level, with the deposit rate standing at a record high 4.00%, the ECB will be closely watching the September inflation release for further signs of fading price pressures, as the debate moves to the duration for which policy will need to remain restrictive.

Though all estimates have yet to be compiled by Bloomberg, headline inflation is likely to have slipped just under the 5% YoY handle this month, with core prices set to remain at 5% YoY; a promising decline on both metrics, though clearly still some distance away from the ECB’s 2% price target.


Overall, however, the policy implications of the release are likely to be relatively limited, especially with policymakers continuing to project headline inflation remaining above the 2% target for the entirety of the forecast horizon, until the end of 2025. Markets appear largely onboard with this view, pricing just a one-in-five chance that the ECB tighten policy further before the end of the year.

Where a string of cooler than expected prints may have an impact, however, is in the pricing of rate cuts, with OIS currently implying that the first 25bp depo rate cut will come early in the second half of 2024. This pricing is likely to be brought forward, despite rhetoric from ECB policymakers to the contrary, were inflation to cool more rapidly than expected or, perhaps a more likely scenario, if economic momentum continues to wane at the rapid rate currently being seen.


For the common currency, it is these longer-run growth dynamics that will determine the EUR’s most likely direction, with the G10 FX market clearly trading on the theme of relative growth differentials, as evidenced by the USD’s continued solid performance.

From a technical standpoint, with EUR/USD having now taken out long-standing support at 1.0650, the 1.0500 handle is rapidly coming into view, a level at which the bears may look to take some profit off the table, and where price may begin to consolidate a little. However, with risks to the eurozone economy intensifying, and the Fed set to retain their hawkish stance for some time to come, a further decline to the mid-1.03s cannot be ruled out.


To the upside, for any rallies to be sustained, price will need to reclaim, and hold a retest of, the 200-day moving average at 1.0830; beneath which, rally selling is likely to remain the market’s preferred strategy.

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