Eurozone inflation data eases pressure on the European Central Bank (ECB) to raise interest rates further, causing EUR/USD to remain subdued.

Eurozone inflation further declined in July 2023. Although the figures met expectations, EUR/USD remained motionless, around 1.0875, at the beginning of the New York session on Friday (August 18). EUR/GBP continued to be restrained around 0.8550, although UK retail sales today were quite disappointing.

EUR/USD

Eurostat reported that the Consumer Price Index (CPI) of the Eurozone weakened by -0.1% (month-over-month) in July 2023, as expected, for both overall and core categories. This decline subsequently pushed the annual CPI for the overall category down from 5.5% (year-over-year) to 5.3% (year-over-year), while Core CPI remained stagnant at 5.5% (year-over-year).

These figures alleviate pressure on the European Central Bank (ECB) to raise interest rates this year aggressively. Market participants still anticipate one more ECB interest rate hike before the end of the year, but its announcement may not necessarily occur in September as previously anticipated. Instead, there is growing discussion about a possible additional 25 basis points interest rate increase in October.

The ECB has raised interest rates by 425 basis points since July 2022, placing its benchmark rate at the highest level in the last 23 years. The ECB's announcement at the end of July increased rates by 25 basis points without providing clear guidance for the next hike.ECB President Christine Lagarde also acknowledged possibly the subsequent interest rate increase.

The ECB's stance, coupled with a dovish warning from another ECB official, underpins the decline of EUR/USD over the past month. This time, Eurozone inflation data also reinforces its bearish trend fundamentally, implying that EUR/USD might only reverse its course if there is an improvement in market sentiment or negative news from the greenback's side.