Eurozone inflation risks are tilting to the upside following a reversal in energy prices driven by renewed US-Iran tensions, according to Rabobank analyst Bas van Geffen. While June’s flash inflation estimate came in softer than anticipated, potentially giving the European Central Bank breathing room at its July meeting, the recent rebound in energy costs threatens to push future inflation readings higher after weeks of declines.
The shift represents a critical change in the inflation outlook that had previously been trending downward on the back of falling energy prices. Geffen warns that the energy shock stemming from escalating Middle East geopolitical tensions could derail the disinflationary momentum the ECB has been counting on to justify maintaining or adjusting its current monetary policy stance.
Traders and brokers should monitor Eurozone inflation data closely in coming weeks as energy price movements feed through to headline figures.
FXnCO Insight
Any sustained energy price surge could force the ECB to reconsider its dovish pivot, creating volatility in euro-denominated assets and interest rate derivatives.
Source: FXStreet