Euro Stands To Soften As Weaker CPI Limits ECB Rate Hike Prospects

A continued focus on the US side of the EURUSD pair has kept attention away from news in the Euro-zone, as CPI unexpectedly fell to an annualized rate of 1.7 percent during the month of August - well below the European Central Bank’s 2.0 percent ceiling.

While the core measure remains elevated at 1.9 percent, there is far less impetus for the ECB to raise rates 25 basis points to 4.25 percent before year end, despite commentary from ECB President Jean-Claude Trichet that policy remains “accommodative.” In fact, ECB Governing Council Member Yves Mersch on Thursday that the ECB “may resume tightening” depending on the analysis of new data, and at the time of the statement this was widely perceived as being quite hawkish. However, with the new data indicating that price pressures are not as strong as they were previously, Mersch’s rhetoric may signal that the ECB’s tightening cycle has come to an end. Next week, EURUSD price action will depend very much upon the Fed’s next move, as limited economic data from the Euro-zone will do little to provide a bias for the ECB’s next move.

Written by Terri Belkas, Currency Analyst of