Recent Eurozone data suggests an increased likelihood of a rate cut in September, given weak PMI figures and slowing wage growth. Meanwhile, the RBA remains hawkish, emphasizing uncertainty around future inflation. Pay close attention to today’s Monthly CPI release, though it only partially reflects Australia’s overall CPI, as it could trigger potential volatility.

EUR: Time to cut again?

The euro remained stable throughout the past trading week, supported by steady risk sentiment. However, several factors could act as catalysts for the Euro moving forward. Notably, several ECB members have shown support for a rate cut in September, citing the persistent weakness in the European economy and the lack of structural improvements as key concerns. Additionally, Q2 wage growth data for both Germany and the eurozone indicated further cooling. Germany’s negotiated wage growth slowed to 3.1% in Q2 from 6.2% in Q1, while eurozone wage growth fell to 3.55% in Q2 from 4.74% in Q1. The German central bank expects a "temporary rise" in inflation towards the end of the year due to base effects, which may delay economic recovery. Meanwhile, the August PMI figures for France, Germany, and the eurozone showed better-than-expected results, driven mainly by the Paris Olympics. However, manufacturing PMIs remained weak at 42.1, 42.1, and 45.6, respectively. The ongoing struggles in the manufacturing sector highlight the fragile state of the Eurozone’s underlying fundamentals, providing another argument for a potential rate cut in September.

Looking ahead, markets will be focusing on the Eurozone August CPI, expectations are for headline HICP to have pulled back to 2.2% Y/Y in August from 2.6% in July, with the super-core metric seen pulling back to 2.8% Y/Y from 2.9%. The prior release saw an uptick in the headline rate to 2.6% Y/Y from 2.5%, with the increase driven by an uptick in energy inflation. Elsewhere, the widely-watched services component ticked lower to 4.0% Y/Y from 4.1%. This time around, analysts at Investec “are pencilling a drop in the headline measure of inflation to 2.3% Y/Y. This is related to energy given the 4.9% fall in oil prices in the month and a positive base effect from utility prices”. Its analysts look for services inflation to remain “sticky” and “do not expect to see a sustained improvement in until wage growth eases more materially.”

As a reminder, regional releases ahead of the Eurozone-wide metric will give traders insight into what to expect for Friday’s release. From a policy perspective, a September rate cut is fully priced with greater interest over how the rate-cutting cycle will proceed thereafter with a total of 64bps of easing seen by year-end which implies two 25bps rate cuts, and a 56% chance of another 25bps reduction.

AUD: Watch out the Monthly CPI!

The near-term outlook for the AUD remains supported by domestic factors, with the latest RBA meeting minutes indicating that the Board is likely to keep rates on hold for an extended period due to ongoing inflation uncertainty. The RBA stressed the importance of remaining vigilant against inflation risks, maintaining that policy must stay restrictive. Although the minutes suggest a hawkish tone, they also reveal the Board’s reluctance to hike rates, favouring a steady cash rate to gradually manage inflation, even if it takes longer to meet targets. However, external factors present challenges for the AUD. Iron ore prices have fallen below USD 100 per ton, and while investors are cautiously returning to carry trades, the RBA continues to resist market expectations of a 25bps rate cut by year-end.

Looking ahead, market attention will focus on Australia’s Monthly CPI data and July Retail Sales. The weighted CPI y/y is forecast to ease to 3.4% from 3.8%, with some analysts predicting a potentially lower print due to energy rebates introduced by the Commonwealth, Queensland, and Western Australia governments in July. Westpac, for instance, expects a 32% drop in electricity prices, which could result in a Weighted CPI of 2.9%, below market forecasts. This data will be crucial from the RBA’s perspective, given the recent hawkish tones from the central bank.

As a reminder, the most recent RBA Minutes from the August 5th-6th meeting noted that the Board considered a rate hike but ultimately decided that holding rates steady better balanced the risks. RBA Governor Michele Bullock reiterated a hawkish stance in the post-meeting press conference, stating that while a rate cut is not on the near-term agenda, the Board is ready to raise rates if necessary. She also emphasized that market pricing for rate cuts over the next six months does not align with the Board’s outlook.

EUR/AUD 4H Chart

Current EUR/AUD Retail Sentiment

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