Euro Outlook: Double-digit Eurozone Inflation to Offer Scant Support

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The European Central Bank (ECB) is expected to come "out in force" in response to Eurozone inflation data that has reached double digits, however this will offer scant support to Euro exchange rates say analysts.

Eurozone CPI inflation surprised by coming in at 10% year-on-year in September, ahead of expectations for 9.7% and representing an increase on August's 9.1%.

Eurostat said the rise was driven by a 1.2% month-on-month rise, doubling the 0.6% gain of August.

Gas price rises are the main culprit, with the Netherland's recording a scarcely believable increase in 17.1% for September.

Price pressures are however seen growing across the board, and not just in energy, leading the market to price a more robust response at the ECB this October.

"Such a figure should bring the European Central Bank out in force and cement expectations for a 75bp hike on 27 October," says Chris Turner, analyst at ING Bank.

The Euro was nevertheless unsupported by the data, losing ground to both the Pound and Dollar on Friday.

The non-reaction confirms interest rate hike expectations are not having the effect on Euro exchange rates as has been the case in the past.

"Short-term interest rate differentials have had little bearing on EUR/USD pricing recently. And the bounce in EUR/USD over the last 24/48 hours may well be a function of the recovery in sterling," says Turner.

The Euro to Dollar exchange rate is down half a percent on the day at 0.9783 while the Euro to Pound exchange rate is marginally lower at 0.8793.

"0.9850/0.9870 may prove intra-day resistance for EUR/USD - but high volatility and tighter liquidity mean that we're in a noisier period for FX. Ultimately, however, we think the pressure remains for EUR/USD to break below 0.95 later in the year," says Turner.

Asmara Jamaleh, an economist at Italian lender Intesa Sanpaolo says an acceleration of the ECB rate hike path - in reaction to the inflation data - "should not be enough – alone – to shield (the euro) from renewed weakness,"

Energy prices rose 40.8% in September and accounted for the majority of the Eurozone inflationary push.

Food prices were also notable following a 11.8% increase.

Prices for consumer durables were up 5.6%, reflecting the rise in core CPI from 4.3% in August to 4.8% in September.

"This will be closely monitored by the ECB in particular, as the price trend continues to broaden," says Ulrike Kastens, Europe Economist at DWS Group.

Leading indicators such as producer prices and surveys on price developments signal that an end is not yet in sight, she says.

Nevertheless, inflation could peak in the coming months, according to DWS, and the planned German gas brake is likely to contribute to this.

"However, a continued failure to meet the inflation target is still to be expected. Only a normalization of monetary policy is therefore not enough in this environment," adds Kastens.