• The German statistics agency Destatis will release CPI data on Thursday.
• The headline CPI is expected to rise by 2.1% year-on-year in August.
• The ECB has still not made a decision on changing interest rates in September.

The European Central Bank (ECB) is due to meet next month to review its monetary policy, making upcoming data on the Harmonized Index of Consumer Prices (HICP) in Germany, due for release on Thursday, potentially crucial given its potential impact on the central bank’s monetary policy decisions.

Meanwhile, the euro (EUR) could partially halt its recent forceful upward trend, especially against the US dollar (USD), if inflation data in eurozone economies, especially Germany, indicate a sustained downward trend.

What can we expect from the upcoming German inflation report?

Germany’s Federal Statistical Office (Destatis) will release official data on Thursday. Germany’s annual consumer price index (CPI) is expected to rise by 2.1% in August, down from a 2.3% enhance in the previous month. Monthly CPI inflation is expected to show a modest enhance of 0.1% in the reporting period.

Meanwhile, Germany’s annual Harmonized Index of Consumer Prices (HICP) is forecast to fall to 2.3% in August, down from 2.6% in July. The monthly HICP is likely to remain unchanged last month, down from a 0.5% enhance in July.

A further cooling in inflation in Europe’s largest economy could be suggested by softer inflation readings for the eurozone as a whole due on Friday. The eurozone’s headline CPI is expected to have risen 2.2% in the year to August, a slowdown from a 2.6% rise in July, while core inflation, which strips out food and energy costs, is also expected to fall to 2.8% in the same period, down from a 2.9% rise in the previous month.

On Tuesday, Dutch politician Klaas Knot argued that the European Central Bank (ECB) could gradually cut interest rates as long as inflation reaches its 2% target by the end of 2025 at the latest. He said he was cheerful to gradually ease the brakes, provided the path of disinflation is still consistent with a return to 2% inflation by then. Knot also said he would have to wait for a complete set of data and information before deciding whether a rate cut in September would be appropriate.

The cautious tone follows comments from ECB Chief Economist Philip Lane over the weekend, who noted that there was no guarantee the central bank would successfully push inflation back to its 2% target, suggesting that tight monetary policy was still necessary. Lane also stressed that the monetary stance must remain in tight territory for as long as necessary to steer the disinflation process towards a timely return to target. However, he also warned against keeping rates high for an extended period, as this could result in persistently below-target inflation.

Ahead of the release, TD analysts noted: “Strong base effects in the energy components will help core inflation approach target in the eurozone — the eurozone core rate is likely to fall as much as 2.1% y/y, while German HICP inflation should fall to 2.2% y/y. Core inflation should remain firm, however, but remain on a disinflationary path.”

When will the HICP inflation report be released and what impact could it have on the EUR/USD exchange rate?

The preliminary HICP inflation report for Germany is due at 12:00 GMT. In the run-up to the inflation data, EUR/USD appears to have lost some of its upside momentum after hitting novel 2024 highs just above 1.1200, the level seen at the start of the week.

Markets have already anticipated around 100 basis points of easing by the US Federal Reserve (Fed) in the second half of the year, with the start of the easing cycle coming as early as September. However, it is unclear whether the ECB will follow suit, given recent cautious comments from policymakers. So far, the broader debate seems to have shifted towards the health of both economies, with the US clearly showing a decent lead.

If core and headline inflation data turn out to be hotter than expected, this could strengthen expectations for another ECB rate hike in the next few months, supporting the European currency and thus opening the door to a continuation of the ongoing EUR/USD uptrend. On the other hand, a negative surprise, i.e. an acceleration of the disinflationary trend, would have the potential to remove some strength from the euro and thus reveal a likely reversal to lower levels.

Pablo Piovano, Senior Analyst at FXStreet.com, notes that a break above the 2024 high at 1.1201 (August 26) could prompt the pair to take a likely trip to the 2023 high at 1.1275 (July 18), supported by the 1.1300 milestone.

For downside attempts, Pablo suggests initial struggles should come at the weekly low of 1.0881 (August 8), which appears to be reinforced by the interim 55-day moving average at 1.0879 and comes before the critical 200-day moving average at 1.0851.

To summarize, Pablo believes that the constructive bias for the currency pair will continue as long as it trades above the key 200-day moving average.