Ahead of the ECB governing council meeting, the eurozone will see the release of data on consumer inflation for June, with figures projected to accelerate further.
According to the market consensus, the CPI is expected to rise to 8.6% y/y in June from 8.1% in May, and rise by 0.8% on a monthly basis.
How can persistent inflation affect the ECB's interest rate decision?
We may assume that EU officials are now more concerned about a sharp increase in interest rates by the ECB than about the possibility of a recession and its fallouts in the eurozone followed by stagflation amid record inflation. The EU authorities and the ECB seem to still be clinging to the hope that the economy will escape a recession, and that there will be no such problem anymore. In any case, all previous measures of the government and the regulator clearly point to this, even the bank's decision to lift the interest rate by 0.25% at the meeting tomorrow.
In spite of growth in inflation, the ECB is willing to raise the rate by 0.25%. The market has already priced in the decision. So, the local stock market is likely to fall again because raging inflation is simply destroying the region's economy. Nevertheless, the expected rate hike will hardly provide support for the euro against the dollar due to a wide gap between the Fed's and the ECB'S interest rate. Tomorrow, after the increase, the ECB's interest rate will come in at 0.25%. Meanwhile, the Fed is planning to lift the rate by 0.75% to 2.50% the following day. So, it will be 0.25% in the eurozone versus 2.50% in the United States.
It is highly possible that the forex market will see EUR/USD falling below the parity level to the next target of 0.9000. With interest rates rising further in the US and the eurozone, the gap between them will only widen, which is clearly a negative factor for the euro.
Why can the European stock market resume the downtrend after the ECB's rate decision although it will be not as large as in the US?
It can be due to rising recession risks in the region amid stagflation. Instead of acting aggressively to reduce inflationary pressure, the European regulator has chosen a go-slow approach. Of course, it has not caused a slowdown in economic growth, but it certainly will if unpopular measures to combat inflation are implemented poorly. In this light, the European economy could actually enter a recession. This, in fact, is the main reason for a fall in the European stock market. The situation is further aggravated by a decrease in energy supplies to the region due to the geopolitical confrontation between Russia and the West.
Daily outlook:
AUD/USD
The pair trades below 0.6860. Quotes will rise to 0.6960 should the pair go above the mark.
GBP/USD
The pair has approach resistance at 1.1985. If it climbs above the level, growth may extend to 1.2055.