This week the focal point for the EUR is the July flash eurozone CPI print on Thursday, notes BNP Paribas.
“Our economists forecast HICP inflation to have moderated to 0.4% y/y from 0.5%. This is below the consensus of 0.5% and, furthermore, our economists highlight that the risks to their forecasts are to the downside,” BNP projects.
“Such a soft reading would mark a new cyclical low, continuing to suggest that inflation is running well below the ECB’s expectations. We do not think this will trigger a policy reaction as the ECB waits to assess the impact of previous easing measures,” BNP adds.
“Paradoxically for the EUR weaker inflation could push inflation expectations even lower, thus lifting eurozone real rates. However, inflation expectations are already very depressed (at 0.85% according to 2y inflation swap) and have limited scope to move to the downside, so we expect EURUSD real rate differentials to be dominated by the rise in US nominal yield,” BNP argues.
Technically, BNP thinks that a break of 1.34 and 1.3374 (50% retracement of the 1.2760-1.3989 uptrend) would signal further declines towards BNP’s short EUR/USD target of 1.32.