The European Central Bank (ECB) is hopeful that Italy's lower-than-expected inflation in June signals a similar trend in Germany and France later this week.
According to Istat, Italian inflation dropped significantly in June, recording a 0% month-on-month figure compared to 0.3% in May. The year-on-year inflation rate reached 6.4%, well below the consensus expectation of 6.8% and May's 7.6%.
While the Euro's reaction was limited, Thursday's inflation data will play a crucial role in providing updated information to the ECB. It will help determine whether the bank's "hawkish" stance on interest rates is justified at this late stage of the hiking cycle.
The most significant event will be the release of inflation data from Germany's North Rhine-Westphalia region at 06:30 BST. This data typically sets the tone for Europe's largest economy, and state data for Germany will follow throughout the morning, with all-German inflation figures released at 13:00 BST.
France will report its inflation numbers on Friday (07:45), followed by the unified Eurozone release at 10:00.
The decline in energy prices was the primary factor behind the unexpected drop in Italian inflation. Paolo Pizzoli, Senior Economist for Italy at ING Bank, notes that the energy component remains the key driver in the slowing pace of Italian inflation.
Italian core inflation also decreased to 5.6% in June, down from 6% in May. Pizzoli suggests that conditions are emerging for a further decline during the summer months, although he cautions against ruling out the possibility of renewed inflationary pressures in the future.
The ECB would welcome a replication of these developments in other major European economies. However, it is unlikely that any undershoot in inflation will be significant enough to deter the ECB from a July hike.
The critical question for currency markets is what will happen in September. Will inflation cool down enough by then to prompt the ECB to pause the hiking cycle?
If that turns out to be the case, the Euro may come under pressure once again. The first opportunity to test this theory will arise on Thursday with the release of Germany's inflation data.
