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Inflation Data and Economic Sentiment Shifts

ECONOMYInflation Data and Economic Sentiment Shifts

Yesterday, we received the final inflation readings, which went almost unnoticed. However, a lot happened after the very good reading of the business sentiment index in Germany. The market is now waiting for the inflation data from the USA.

Weaker Yo-Yo Effect in the West

After the inflation data from our part of the continent, there were concerns about what the Eurozone countries would show. However, it turns out that the data from both Germany and Spain did not surprise analysts. In Germany, the price increase remained at 2.2%, the lowest since the beginning of the current inflationary pressure. In Spain, we are at 3.3%. Although this is significantly higher than the low of 1.9%, it is important to remember that this low occurred in June 2023 because Spain managed to curb the rate of price increases faster than other economies. The current level is, however, 0.1% higher than a month ago. Some risks can be seen in the monthly data for both cases, although it is not yet alarming. Controlled inflation is a phenomenon that could accelerate interest rate cuts by the ECB.

Improving Sentiment in Germany

Looking at yesterday’s chart of the main currency pair, there could have been some doubts. If the inflation data were bringing interest rate cuts closer, why was the euro strengthening? The key turned out not to be the inflation data from Germany but the ZEW Institute’s index. This is a survey showing optimism about the economic situation over the next six months, involving analysts specializing in finance and economics. The result of 47.1 points is the highest since the beginning of the Russian invasion of Ukraine. As recently as December 2022, this indicator clearly exceeded 50 points. Since then, both the German economy and sentiment have been under significant pressure. Better future prospects explain yesterday’s strengthening of the euro against the dollar. The European currency is the strongest it has been in over a month.

Waiting for US Inflation

Tomorrow we will get the US inflation reading. This is the main indicator shaping market expectations regarding US interest rate levels. Currently, the chances of maintaining interest rates in September are falling again to around one-third. Earlier cuts are now unlikely, although inflation data can change this. If the rate of price increases is significantly lower than expected, we might return to speculation about rate cuts in July. If the reading is significantly higher, expectations may shift towards November or possibly even December. It should be noted that accelerating the expected rate cuts should be associated with a weakening dollar in the market, while the later the market expects the cuts, the stronger the dollar should be.

Maciej Przygórzewski – Chief Analyst at and

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