Eurozone CPI slips, aids the ECB doves


The Final reading for Eurozone HICP inflation unexpectedly revised down to 1.0% y/y in the final reading for July from 1.1% y/y reported initially and versus 1.3% y/y in June. The core reading was confirmed at just 0.9% y/y, down from 1.1% y/y in the previous month.

Prices fell -0.5% m/m, largely on a -3.3% m/m drop in prices for non-energy industrial goods, but also a -0.6% m/m decline in energy price inflation. Annual energy price inflation fell back to just 0.5% y/y in July, from the recent high of 5.3% y/y in April and the declines in import and producer price inflation of recent months are increasingly feeding through the product chain. Services price inflation also decelerated – to 1.2% y/y from 1.6% y/y in June .

Overall the data will add to the arguments of the doves at the ECB, who are pressing for a comprehensive and decisive package of easing measures. Bund yields still remain up on the day, despite the weaker than expected data, amid general curve steepening as investors position for further stimulus. However, the 2-10 year part of the UK curve remains inverted, even if the gap has narrowed this morning. The 2-7 year part of the curve is still very much inverted, as no-deal Brexit risks continue to hang over the economy. Peripheral markets are outperforming this morning and the Italian 10-year yield is up 8.2 bp at 1.467%, versus a 4.3 bp rise in the German 10-year as investors look ahead to PM Conte’s showdown in the Senate tomorrow.

EURGBP has softened since the data from highs of 0.9164 back to the 0.9150 zone, EURUSD has dipped to test 1.1100 area and EURJPY is off two-session highs from earlier at the 200-period moving average and R2 at 118.455 to trade at 118.30.

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Stuart Cowell

Head Market Analyst

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