Inflation Hits Double Digits as ECB Run Out of Options

• EZ Unemployment Rate 6.6% Actual Vs 6.6% Forecast.
• EZ CPI Inflation YoY (Flash) 10% Actual Vs 9.7% Forecast.
• EZ Core Inflation Rate YoY (Flash) 4.8% Actual Vs 4.7% Forecast.

EURO Fundamental Outlook

The inflation rate In the Euro Area increased to 10% YoY in September from 9.10% YoY in August beating estimates of 9.7%. Faster increases were seen in costs of all items with food, alcohol and tobacco (11.8% vs 10.6% in August), energy (40.8% vs 38.6%), non-energy industrial goods (5.6% vs 5.1%) and services (4.3% vs 3.8%). These numbers will only intensify the euro area’s economic crisis and pile further pressure on the ECB, who are fast running out of options.

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Today’s numbers come on the back of German inflation hitting double digits yesterday, with a print of 10.0% YoY, quite a jump from the August print of 7.9% YoY. The jump wasn’t much of a surprise given the print was the first without the energy relief package over the summer months. The subsidies around public transportation and gasoline ended as well, which would have resulted in an increase, however it was the size of the increase that caught most of guard. Earlier today however, French inflation took an unexpected breather with consumer prices rising 6.2% YoY down from 6.6% YoY in August. The print however seems to be misleading as energy and services declined but food prices accelerated. An indication that inflation seems to be more entrenched and increasingly domestic driven.

Given the data out this week it’s hard to see anything other than a 75bp hike by the European Central Bank (ECB) at its upcoming meeting on the 27th of October. The Central Bank is running out of options despite the growing probability of a recession, with ECB policymakers’ adamant that more rate hikes are a necessity.

Market Reaction

EUR/USD 1H Chart

Source: TradingView, prepared by Zain Vawda

EURUSD saw a 20 pip spike lower in the immediate aftermath of the news, surprising considering the increasing inflation print should strengthen the case for an 75bp hike by the ECB in October.

On the 1H as discussed in yesterday’s piece we have reached the 0.98500 resistance area with a possibility of pullback definitely on the cards. Support rests around the 0.9750 and further down at the 0.9640 areas. There is a possibility the 20,50 and 100-SMA provide support on a pullback which could see us push higher once more. It might be worth noting today is the final trading day of the month and quarter. We could very well be looking at a volatile close to the week.

— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda