Stubborn German & Spanish Inflation Underpins Euro, Casts Doubt on Sept. ECB Rate Cut

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German inflation beat expectations and set up the prospect of a sticky all-Eurozone inflation print midweek and raises fresh doubts over a September rate cut at the European Central Bank (ECB).

Euro exchange rates were higher on the day it was announced Eurozone GDP grew faster than was expected in the second quarter and German CPI inflation rose 0.3% month-on-month in July, which is higher than June's 0.1% and economists' expectation of 0.2%.

"Stubborn inflation will keep the Euro supported," says Matt Lewis at TopMoneyCompare.com. "The ECB won't feel rushed into delivering more cuts."

Germany's annual rate now stands at 2.3% y/y, up from 2.2%. The harmonised reading - which plugs directly into the Eurozone figures - reads 2.6% y/y, up from 2.5% and ahead of the consensus expectation for 2.4%.

It was also revealed today that Spain's HICP reading read at 2.9%, which is below expectations for 3.3% but still well ahead of where the ECB would like.

According to Andrew Kenningham, Chief Europe Economist at Capital Economics, these data mean the aggregate eurozone inflation rate is unlikely to have fallen.

Investment bank consensus forecasts update: The end-2024 and 2025 guide from Corpay has been released. It shows a sizeable uplift was made to the consensus forecasts for GBP/EUR. Please request a copy here.

"For now, we still think the ECB is most likely to deliver another 25bp rate cut at its 12th September meeting, but it looks likely to be a close call and will depend on the August inflation data," says Kenningham.

Should markets become increasingly doubtful over the prospects of a September rate cut at the ECB, the Euro can find itself better supported over the summer as Eurozone bond yields firm relative to elsewhere.

This could underpin expectations in some circles that the Pound-Euro exchange rate has already topped out and underscore the rangebound theme in Euro-Dollar.

"The slight increase in German inflation not only highlights the stickiness of inflation but also suggests that a September rate cut is not a done deal," says Carsten Brzeski, Global Head of Macro at ING.