The euro appeared to have a reduced sensitivity to the inflation report released earlier this month, as markets were more focused on the USD. And this may well be the case today as markets seem to have made up their mind about the ECB monetary tightening. So, today’s final read CPI (consumer price index) report didn’t have much impact either, especially as it remained unchanged.

Markets are expecting a 25 bps (basis point) rate hike on Thursday and a 50 bps (0.50%) hike in September. So, rate hike expectations have been mostly priced in for this year and the first quarter of next month. But, some economists are wondering whether major central banks including the European Central Bank (ECB) will start cutting rates again next year as soon as inflation cools off.

Nomura said last week that it expects the FED to reach a terminal rate of around 3.50% to 3.75% by February 2023 before reversing the policy to start rate cuts in September 2023. Meanwhile, the firm expects the ECB to hike rates by 175 bps by March next year before starting out with a 25 bps rate cut in June 2023 as a potential recession drags on.

A recession is very likely as services and manufacturing cool off considerably particularly in Europe but in the US as well, while China is having major problems with bank run-offs as the public is rushing to withdraw their savings while banks are running out of cash. So, if recession creeps in central banks can’t raise rates anymore and will think about cutting them.

Eurozone June Final CPI Inflation Report

EUR/USD Live Chart