The increase causes more friction amongst the ECB

The latest Eurozone HICP inflation, released Friday, accelerated to 8.6% (YoY/Jun), above estimates of 8.4%. Take the frothy Food, energy, alcohol and cigarettes out of the equation, and the 3.7% reading actually came in just under expectations of 3.9%. The headline figure was up from 8.1% during May, therefore highlighting the big jump in energy and food costs, given supply constraints accelerating due to the ongoing conflict in Ukraine.

Will inflation finally force the ECB to re-think?

Whilst Christine Lagarde has stood firm in the face of constant pressures from within the ECB to increase the level of the first ECB rate hike later this month from 0.25% to 0.5%, that latest inflation print could well give the hawks enough ammunition to finally force a re-think from the more dovish Lagarde. Interestingly enough, at the ECB forum in Sintra last week, Lagarde focussed more on lesser hikes, mentioning that if inflation slowed down materially, then the ECB are likely to ‘only’ raise rates by another 0.25% in September. Despite the positive news that German inflation had unexpectedly decreased last week, the benefit was not enough to impact the region-wide reading, leaving Lagarde & Co with some serious thinking to do ahead of the next ECB meeting.

Borrowing costs matter too

Of course, one of the almost impossible issues that the ECB currently face is trying to balance the need to raise rates to combat surging inflation, against not moving so swiftly in an attempt to mitigate that big jump in borrowing costs for some of the more indebted nations in the Eurozone, such as Italy. For any of you who may have missed our weekly publication, Italy has just had to pay the highest yield on its latest bond auction since the last eurozone debt crisis, paying a hefty 3.47% yields on its 10year bond.

How about the Euro?

Despite the news on inflation, the single currency finished last week toward the bottom end of its recent range, with EUR/USD briefly slipping as low as 1.0365, before finding some support and closing the week back above 1.0400. That move, however, was as much to do with dollar strength driven by a broad risk-off climate. GBP/EUR is now back at 1.1600, but the intra-day volatility is increasing substantially, after a fairly quiet period proceeding.

A weaker ISM

In the U.S, the latest ISM PMI missed estimates on Friday, slipping back towards the key 50 region at 53, having declined from around 56.1 in May. Furthermore, the latest ISM Manufacturing report also missed across the board, with Employment and New Orders both slipping. The report will add fuel to the fire that the U.S economy is now cooling, and although there may be enough bright spots to calm fears of an imminent recession, the signs are concerning. This will ensure that this week’s May payroll report (Friday) will have even more added spice for markets.

A stronger dollar (in part)

All of the negativity helped to ensure that the dollar made solid, if unspectacular gains through last week. The dollar index (DXY), probed beyond the sensitive 105.00 region for a spell on Friday, and even though it closed below, it was still close enough to give the dollar bulls momentum. However, both USD/CAD and USD/JPY finished the week with the dollar on the backfoot, with the former being restrained by higher oil prices, and the latter declining on broader risk aversion.

GBP/USD moves back under 1.2000 (again)

The pound finished last week on a soft note, driven by that risk aversion, fears over a cooling global economy, and worries over the UK economy specifically. GBP/USD dropped below 1.2000 for the second time in June, and although the pair staged something of a recovery back above 1.2000 by the close on Friday, the pound continues to look vulnerable to potential downside forays. With a distinct lack of keynote UK data this week, the pound will likely take its cues from broader market sentiment.

What else is happening today?

EUR – Sentix Investor Confidence (Jul), PPI (May)

CAD – S&P Global Manufacturing PMI (Jun), Bank of Canada Business Outlook Survey

NZD – NZIER Business Confidence

AUD – S&P Global Composite & Services PMI

JPY – Labor Cash Earnings, Overall Household Spending