Euro Edges Lower on Mixed US Inflation, ECB Decision Next

• US inflation rises but core inflation falls to a two-year low
• All eyes are on the ECB rate decision on Thursday

The euro is trading quietly on Wednesday. In the North American session, EUR/USD is trading at 1.0739, down 0.16%.

The August US inflation report today was an interesting mix. Headline inflation rose for a second straight month, from 3.2% y/y to 3.7% y/y and above the consensus estimate of 3.6% y/y. On a monthly basis, headline inflation rose 0.6% in August, while core CPI came in at a modest 0.3%.

The jump in headline inflation will no doubt grab the headlines and cause some groans. Nobody wants to see inflation rise, but the main driver of the upswing was higher gasoline prices, which can change quickly from one month to the next. If gasoline prices reverse direction and fall sharply, that will weigh on headline inflation.

The Federal Reserve will be paying more attention to Core CPI, which fell to 4.3%, down from 4.7% in July. This matched the consensus estimate and notably, marked the lowest level since September 2021. The inflation report should cement a pause from the Fed at next week’s meeting.

Will the ECB Raise Rates?

The European Central Bank meets on Thursday and it remains unclear whether policymakers will raise rates by a quarter-point or pause for the first time after nine straight hikes. Interest rate futures have priced in a hike at 65% but both the hawks and doves at the ECB have persuasive arguments.

The hawks will argue that inflation has fallen to 5.3% in the eurozone but it’s unrealistic to expect inflation to fall back to the ECB’s 2% target without further rate hikes. With a deposit rate of 3.75%, there is still room for the ECB to continue raising rates and push inflation lower, which is the central bank’s number one priority.

The doves will respond that inflation is moving in the right direction and a pause will give the central bank time to monitor the effects of rate hikes. The eurozone economy is sputtering and Germany, the bloc’s largest economy is now expected to fall into a recession, according to the European Commission. If the ECB continues hiking, it will only worsen economic conditions. I don’t envy ECB President Lagarde, who will have to decide which position to adopt and may face criticism no matter what she does.

EUR/USD Daily Chart

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