Summary:

• German flash CPI for August rises to 1.8% Y/Y
• Spanish flash CPI also rose earlier to +1.6% Y/Y
• French and Eurozone CPI releases tomorrow
• ADP employment change shows +180k

The second of four key inflation metrics to be released from the Eurozone area in just over 23 hours has shown a second increase in price pressures within the continent. German flash CPI in August rose by 1.8% year-on-year following the rise of 1.6% announced by the Spanish equivalent this morning. 

 The latest releases of the German and Spanish CPIs have both shown increases. Will this rise support the Euro’s latest rally? Source: XTB Macrobond

Tomorrow morning at 7:45 AM (BST) we get the French CPI release before the Eurozone wide figure at 10pm (BST). With the Spanish and, in particular, the German economies being amongst the largest in the Eurozone the rises seen today imply a good chance that the Eurozone wide figure will rise tomorrow. 

Whilst rising inflation back towards the ECB’s 2% threshold may be seen as supportive of the single currency, it should be pointed out that today’s increases have only been marginal. Furthermore the rise in the Spanish number was in fact smaller than the consensus forecast and the German number was in line with expectations. The consensus forecast for the Eurozone wide figure is for a rise of 1.4% Y/Y, compared to +1.3% Y/Y seen previously. Whilst this is mildly positive it isn’t by itself a strong enough increase to offer much support to the recent rise seen in the Euro, and with bond yields also failing to support the EURUSD rally of recent months there could be a pullback ahead.

Now if we turn our attention to the US side of the EURUSD pair, it’s a big week for the US dollar with the USD index (USDIDX on xStation) hitting its lowest level since January 2015 yesterday. This Friday sees the August non-farm payrolls released and many traders and analysts see today’s ADP number as an important precursor. Along these lines the release of +237k vs +185k exp for ADP is a strong positive going into the more widely viewed labour market report, with an upwards revision to the prior thrown in for good measure (revision +201k vs +178k prior). 

 The ADP employment change has acted as a fairly accurate predictor of NFP and today’s large beat could bode well for Friday’s release. Source: XTB Macrobond

The combined reaction of these releases, along with the US GDP (report to follow) have pushed the EURUSD back down to test the 1.19 handle. There now appears to be a possible head and shoulders setup on a H1 chart from the large moves higher in recent sessions. The all important neckline for this potential reversal formation comes in around 1.1918 and should it play out in a textbook manner then the target would be 1.1767 – marking a complete reversal of the gains seen since Yellen began her Jackson Hole speech. 

 The EURUSD has broken below a potential neckline of a head and shoulders setup at 1.1918 following the data releases. Source: xStation