Eurozone inflation flat

Inflation held steady at 1.3 percent in July. A flash estimate of consumer prices in the euro area were left unchanged from a month before. Broadly in line with analyst expectations – it was the lowest level since December last year. Services prices rose at a slower pace and the cost of energy expanded. Despite escalating energy prices, core inflation rose to 1.2 percent from a 1.1 percent gain in June.

This confirms ECB President Mario Draghi’s expectations for low inflation through the summer. This reinforces Draghi’s assessment that there isn’t a sustained upward trend yet, despite better macroeconomic data. Policymakers target two percent for headline inflation – targets that remain unsatisfied. Eurozone unemployment fell to its lowest level since 2009 in June.

The ECB will likely make a decision on whether or not to extend its massive quantitative easing program. Analysts have been increasingly bullish on prospects on scaling this back, but Draghi has been quite cautious, citing sluggish core inflation and wage growth as reasons to keep their support mechanisms in place.

Will euro tap out?

Despite ECB President Draghi’s caution, the euro continues to run hot as the economy continues to outperform – especially when compared to many other developed economies. Peripheral weakness from other major currencies is compounding the issue. Our Chief Economist Jeremy Cook has expressed doubts of sustainable appreciation from current inflated levels, but notes that this view will be tested by this week’s run of data.

PMIs and growth figures will be keenly watched ahead of the next ECB meeting in September.

A higher euro is unlikely to go over well with the European Central Bank. They noted a higher value currency in their most recent policy meeting, but refrained from commenting further.  We would not be surprised if the euro puts in a high for the year against the US dollar in the coming weeks.

Oil!

Oil hit $50! A barrel of West Texas Intermediate crude oil briefly traded above $50 a barrel early Monday. While it quickly scaled back below this threshold, it marks a bullish sentiment for the commodity.

Investors seem more optimistic on oil’s prospects after some OPEC members promised additional supply cuts. Kuwait and the UAE have agreed to additional cuts in an effort to help curb the ongoing issue of global oversupply.

“The U.A.E. is committed to its share in the OPEC production cut” Energy Minister Suhail Al Mazrouei said in a tweet last week.

Despite firmer oil prices, we’ve not seen much follow through in FX markets. NOK is down slightly, Canadian dollar also lower, and the Russian ruble has sold off significantly – but that is a story of macro events. It’s been rumored that President Trump will sign off con Congress’s bill to impose new sanctions on Moscow, and Putin is not happy about it. Promising to cut 755 US diplomats from the US mission left RUB down over a percent against the dollar Monday morning.

EURUSD: Euro flat against the greenback as inflation held steady in July at 1.3 percent.

GBPUSD: Sterling slightly lower after GfK Consumer Confidence fell to -12 in July, matching its lowest reading since the immediate aftermath of the June 2016 Brexit vote.

AUDUSD: Aussie dollar lower after China’s Purchasing Managers Index fell more than expected in July.

USDCAD: CAD slightly weaker despite firmer oil prices – looks like a slight recover for the dollar which is still hovering near 13-month lows.

USDJPY: Dollar slightly lower against the yen as North Korea launches another missile and Japan’s Prime Minister Shinzo Abe calls for President Trump to “take all necessary measures to protect” Japan.