Euro Continues to Strengthen After July Eurozone HICP Data Release

EUR/USD held its ground during Wednesday's European session, trading near 1.16029, extending its post-data strength. The release of the Eurozone's July Harmonized Index of Consumer Prices (HICP) provided support for the euro, driving the pair to rebound from the previous day's modest decline.

**Inflation Broadly Heats Up, Core and Services Prices Rise**

Latest data shows that the Eurozone's overall inflation pressure picked up in July. According to Eurostat, the July CPI annual rate rose to 2.9%, up from 2.8% in June. More notably, core HICP, excluding food and energy, unexpectedly rebounded to 2.5% from 2.4%, while services inflation edged up to 3.3% from 3.2%. This suggests price pressures are spreading from the energy sector to broader parts of the economy, heightening risks of persistent inflation.

**Energy Prices as Main Driver, Wage Pressures Emerge**

The direct driver behind this inflation rebound is energy. Amid ongoing Middle East conflicts pushing global oil prices higher, the Eurozone's July energy price annual increase widened to 10% from 8.5% in June. Bert Colijn, chief economist at ING, noted that if oil prices hold at current levels, inflation still has upside potential in the coming months. Meanwhile, wage pressures are also showing initial signs of firming, further fueling market concerns over sticky inflation. As an offset, food inflation continued its downward trend, falling to 1.2% in July, while non-energy industrial goods price growth held at a low of 0.9%.

**Rate Hike Expectations Rise, Markets Focus on Upcoming Data**

Although the data itself is not decisive, it has significantly boosted expectations for European Central Bank rate hikes. According to Reuters, interest rate swap market data shows traders now price an 85% probability of an ECB rate hike in September. However, before the September policy meeting, policymakers will also receive August inflation readings, and high oil price volatility leaves uncertainty for the policy outlook. ECB President Christine Lagarde warned last week that the spillover effects of the energy shock could be stronger than expected, stating she would remain "highly vigilant" over broader price pressures.