Inflation back in focus ahead of important releases from the US and the Eurozone

The ongoing battle against inflation will be at the centre of markets this week, as new data will shed light on the state of price increases in both the US and the Eurozone.

On Friday, the US personal consumption expenditures index (PCE) for July, the Fed's preferred inflation indicator, will be released.

PCE inflation differs from traditional inflation measures such as the Consumer Price Index (CPI) because it covers a broader range of data. The CPI uses data from household surveys, while the PCE uses data from suppliers, nonprofit organizations, and the country's GDP data.

Analysts expect the PCE index to rise from 2.5 percent to 2.6 percent. However, this would still be low enough for the Fed to cut interest rates in September, analysts said.

“The PCE inflation report can only make a difference if we see a reading closer to three percent. [year on year]“, said Chris Weston, head of research at Pepperstone.

With inflation approaching two percent and growing cracks in the labor market, traders are now confident that the Fed will cut interest rates in September.

In a speech last week, Powell said the “time has come” for the Fed to begin easing its policy.

The only question is whether the Fed will cut interest rates by 25 basis points or opt for a deeper cut of 50 basis points.

Markets estimate the probability of a 50 basis point cut at around 33 percent, but a weaker-than-expected inflation index on Friday could tip the balance in favor of more aggressive easing.

The latest preliminary inflation estimate from the eurozone will also be published on Friday. Economists expect the headline inflation rate to fall from 2.6 percent to 2.2 percent. This would bring the headline inflation rate to its lowest level since July 2021.

However, core inflation, which excludes more volatile components such as food and energy, is likely to remain sluggish. Most economists expect core inflation to fall to 2.8 percent from 2.9 percent in July.