German GfK Consumer Climate Darkens in July on ECB Rate Hikes

Highlights

• In July, the GfK German Consumer Climate unexpectedly fell from -24.4 to -25.4.
• Later this morning, prelim inflation numbers from Italy and ECB commentary will also need consideration.
• However, Fed Chair Powell will likely have the final say late in the European session.

It is a busier day on the European economic calendar. Germany’s GfK Consumer Climate numbers for July were in focus this morning.

The German GfK Consumer Climate Index fell from -24.4 to 25.4 in July versus a forecasted -23.0.

According to the June GfK Report,

• Consumer sentiment toward the German economy deteriorated in June, with the indicator falling 8.6 points to +3.7.
• Stable employment conditions are favorable. However, ECB monetary policy moves caused uncertainty in the economic outlook.
• Income expectations weakened, with the indicator falling 2.4 points to -10.6. Higher inflation rates will lead to a decline in real income that wage growth may not fully offset.
• Despite the sentiment toward the economy and income, the propensity to buy indicator increased by 1.5 points to -14.6. While higher in June, the indicator remains below the two COVID-19 lockdown periods.

Weaker consumer sentiment signals a pullback in spending, which could also lead to a further slowdown in service sector activity.

EUR/USD Reaction to German GfK Consumer Climate

Ahead of the German consumer sentiment numbers, the EUR/USD rose to an early high of $1.09630 before falling to a pre-stat low of $1.09422.

However, in response to the German GfK Consumer Climate numbers, the EUR/USD rose to a post-stat high of 1.09549 before falling to a low of $1.09510.

This morning, the EUR/USD was down 0.08% to $1.09523.

The US Session

Later in the session, prelim inflation figures from Italy will also need consideration. Sticky inflation would support a post-summer move despite bets of inflation softening over the summer break.

ECB President Christine Lagarde, Chief Economist Philip Lane, and ECB Executive Board Members Luis de Guindos and Andrea Enria are on the calendar to speak today. Dovish July sentiment or hawkish September policy intentions would need consideration.

Lagarde had this to say on inflation on Tuesday,

“The shocks that drove up prices are still feeding through to the economy and making inflation more persistent. The break this, we must bring rates to sufficiently restrictive levels and keep them there for as long as needed.”

ECB President Lagarde’s comments followed two days of hawkish Fed Chair Powell testimony and the BoE’s surprise 50-basis point interest rate hike.

Looking toward the US session, there are no US economic indicators to influence. The lack of economic indicators leaves central bankers to move the dial and investors on edge ahead of the US Core PCE Price Index and personal spending numbers on Friday.

An unexpected pickup in inflationary pressure, steady labor market conditions, and a rise in personal spending would support a hawkish Fed ahead of the next Jobs Report.

With no stats to consider until Thursday, Fed Chair Powell will garner plenty of interest. The Fed Chair must maintain the two-rate hike outlook to support the greenback.