European Session

The primary focus during the European session will be the Eurozone Flash CPI report. Headline CPI is forecast to rise 2.9% year-over-year, up from the prior reading of 2.8%. Meanwhile, the Core CPI measure — which excludes volatile food and energy prices — is expected to remain steady at 2.4% year-over-year, unchanged from the previous figure. Core inflation is watched particularly closely by ECB policymakers because it is viewed as a better gauge of underlying price pressures than the headline figure, which can be distorted by energy and food swings.

The European Central Bank (ECB) is widely expected to look for signs of moderating inflation in both this report and the next release before deciding whether to raise interest rates at its September meeting. Following its latest policy decision, the ECB signaled through customary post-meeting communications that it is prepared to hike rates in September unless the inflation outlook improves markedly. This suggests the threshold for another rate increase remains relatively low. The ECB's policy decisions directly influence borrowing costs across the 20-nation eurozone, and shifting rate expectations typically flow through to eurozone government bond yields and the euro's exchange rate.

The ECB is reportedly hoping for softer core inflation figures along with a de-escalation of geopolitical tensions in the Middle East. Currently, markets are pricing in a 68% probability of a rate hike at the September meeting, with a total of 36 basis points of tightening anticipated by year-end.

American Session

During the American session, attention turns to two key US data releases: the Q2 Employment Cost Index (ECI) and the final University of Michigan Consumer Sentiment index.

The ECI is expected to draw the most attention, as it is considered the most comprehensive gauge of wage growth and is closely monitored by the Federal Reserve. One limitation of the ECI is that it is less timely than the Average Hourly Earnings data from the monthly jobs report. The ECI is forecast to tick lower to 0.8% quarter-over-quarter, down from 0.9% in the prior reading. The Fed has been tracking labor cost trends as part of its assessment of whether inflation is sustainably returning toward its 2% target, and a softer ECI reading would be consistent with a gradually cooling labor market.

The final University of Michigan Consumer Sentiment reading also captures updated consumer inflation expectations, which the Fed monitors as an indicator of whether price pressures are becoming embedded in household behavior.