Euro: Pressured as ECB hike looms – Danske Bank

Danske Research Team notes that EUR/USD slipped below 1.1600 as the US Dollar strengthened on a hawkish Federal Reserve stance and geopolitical tensions. The team highlights that Euro area inflation has moved back above 3%, reinforcing expectations for a September ECB rate hike. Manufacturing data show a rebound led by Germany, while unemployment remains historically low.

Range trade as Dollar firms

“In the Euro area, HICP inflation increased to 3.3% y/y (cons: 3.3%, prior: 2.9%), while core inflation declined to 2.4% (cons: 2.5%, prior: 2.5%). The increase in headline inflation was driven entirely by higher energy prices, as food inflation was unchanged and core inflation declined.”

“The decline in core inflation reflected lower services inflation, while goods inflation increased. Momentum in core inflation remains very low with little signs of energy prices spilling over to underlying inflation, as the 3m/3m SAAR measure edged down to 2.6% from 2.7%. With inflation back above 3%, a September hike looks like a done deal.”

“Also from the Euro area, final manufacturing PMI came in at 52.7, broadly in line with the flash reading of 52.8. New data for Spain and Italy showed PMIs falling slightly below the 50-mark, while the German PMI was revised up to 54.3 from 54.1. Euro area manufacturing is thus showing a rebound, with Germany in the driver’s seat, which is very different from what we have seen over the past couple of years.”

“Finally in the Euro area, the unemployment rate was unchanged at 6.4% in July (cons: 6.3%, prior: 6.4%), slightly higher than expected.”

“In the currency markets, the EUR/USD moved below 1.16, while yen moved above the 160-level versus the dollar. However, the movements are small.”

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