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‘Reality check’: Euro pulls back after inflation data

A stumble in eurozone inflation has helped to knock the froth off this week’s sparkling rally in the euro.

The common currency is now down by 0.4 per cent on the day against the dollar after annual inflation edged down to 1.3 per cent in June.

The euro shot higher this week after ECB president Mario Draghi displayed a tighter focus on reflationary pressures in the euro area. While his message was nuanced, and he insisted on “prudence” in shifting monetary policy, markets have shown a distinct shift in direction – a pattern that has also been seen in sterling, for similar reasons.

But the rally in the euro, and decline in eurozone government bonds, have clearly now paused.

JP Morgan Private Bank’s Julien Lafargue wrote:

Although headline inflation came in higher than expected, today’s release confirms that inflationary pressures remain subdued in the Eurozone. After the market interpreted Mr. Draghi’s comments as an indication that the current monetary policy could be normalized sooner rather than later, today’s reality check may serve as reminder to investors that the European Central Bank is still not in a hurry. Yet, the macroeconomic momentum remains supportive and core inflation is gradually recovering. As such the direction of travel for rates, however gradual it may be, is likely higher.