EUR/USD Stumbles after Inflation Surprises on the Downside in June

- Headline inflation holds 2%, in line with earlier estimates.

- Core inflation revised lower to 0.9%, from 1.0% previously. 

- Euro stumbles after release before getting back in the saddle.

© Pound Sterling Live

The Euro sell off resumed Wednesday after core inflation surprised on the downside in June, casting fresh doubt over whether the European Central Bank will really be able to end its quantitative easing programme this year.

Core inflation stalled in June when earlier estimates suggested it had risen by 0.1% when compared to May. This means annual core inflation was just 0.9%, down from 1.0%, and below to 1% initial estimate.

Headline inflation meanwhile maintained the same readings as the initial estimate, coming out at 0.1% compared to May and 2.0% compared to June 2017.

The Euro was already down a quarter percent on Wednesday following an upbeat testimony from Federal Reserve chairman Jerome Powell, who said he sees the US economy on course for "years more of growth", according to Thomas Wilkes, a correspondent for Thomson Reuters.

The lower-than-expected inflation reading in June may lead Eurozone policymakers to put on hold efforts to wind down their quantitative easing programme at the end of 2018.

"Core inflation is revised a tick lower to +0.9%, not too good news as it means that inflation slowed down more than expected. That's not going to help the whole bullish inflation rhetoric by the ECB all too much," says Justin Low, an analyst at Liveforex.com.

The European Central Bank's stimulus programme is a drag on the Euro because it keeps bond yields low and must first come to an end before the European Central Bank (ECB) is able to raise its interest rate. Interest rates are the main drivers of currency appreciation, with higher rates attracting more inflows of foreign capital that is drawn by the promise of higher returns.

The EUR/USD rate fell from 1.16218 to 1.16156 on the inter-bank market in the minutes after the release, however, at the time of writing this article it had recovered back up to 1.1623.

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