THE TAKEAWAY: June CPI drops 0.1%, annual inflation remains at 2.4% -> Lower inflation opens door for more rate cuts -> Euro declines back towards 2-year lows
Euro-zone consumer prices unexpectedly dropped 0.1% in the month of June, but annual inflation remained at 2.4% for the second month. The steady inflation was in line with analysts’ expectations, but surveyed economists expected the CPI to remain unchanged in June. The fall to a 2.4% inflation rate in May set a new yearly low, according to Eurostat.
Greece had one of the lowest annual inflation rates in the Euro-are at 1.0% for June, while German inflation was reported at 2.0%. Alcohol and tobacco prices were up 4.9% annually, housing was up 3.7%, while communication costs were down 2.8% when compared to June 2011.
Euro-zone imports also fell 0.9% in May, while exports grew by 0.3%, according to a separate Eurostat report.
The steady inflation rate confirms comments from the ECB monthly report that inflationary pressures are dropping, and it is possible that lowered inflationary pressures and a faltering economy could lead the ECB to cut their interest rates again, following July’s 25 basis points cut to 0.75%.
The above reasoning possibly explains the EURUSD drop below 1.2200 around the time of the report, as another interest rate cut would be negative for the Euro, but generally risk-positive. Earlier today, EURUSD had been retracing Friday’s rally that followed a better than expected University of Michigan confidence report. Before the report’s release, the pair set a fresh 2-year low at 1.2162, which could provide the next support for the declining pair.
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