Germany's inflation is expected to ease further, with the possibility of another European Central Bank (ECB) rate cut looming.

The European Central Bank (ECB) is set to hold its monetary policy review next month, making the upcoming release of Germany's Harmonized Index of Consumer Prices (HICP) inflation data on Thursday especially critical for shaping the central bank’s policy decisions.

Should the inflation data from the Eurozone, particularly Germany, show a continued disinflationary trend, the Euro (EUR) could lose some of its recent gains, especially against the US Dollar (USD).

What should we anticipate from the upcoming German inflation report?

The Federal Statistical Office of Germany (Destatis) is set to release the official inflation data on Thursday. The annual German Consumer Price Index (CPI) for August is forecasted to increase by 2.1%, slightly lower than the 2.3% rise recorded in July. On a monthly basis, CPI inflation is expected to see a modest uptick of 0.1%.

Meanwhile, the annual Harmonized Index of Consumer Prices (HICP) for Germany is projected to decline to 2.3% in August from 2.6% in July. The monthly HICP is anticipated to remain flat, following a 0.5% increase in the previous month.

If inflation continues to cool in Germany, the largest economy in Europe, it could indicate a broader trend of easing inflation across the Eurozone. The Eurozone’s headline CPI, due to be published on Friday, is expected to rise by 2.2% year-on-year in August, down from 2.6% in July, with core inflation likely to decrease to 2.8%, down from 2.9% in the previous month.

On Tuesday, Dutch policymaker Klaas Knot suggested that the European Central Bank (ECB) could begin gradually lowering interest rates, provided that inflation is on track to reach the 2% target by the end of 2025 at the latest. Knot indicated his willingness to ease monetary policy gradually if the disinflationary trend continues to align with the goal of returning to 2% inflation by that time. However, he emphasized the need to review all data and information before deciding on whether a rate cut in September would be appropriate.

This cautious stance followed remarks from ECB Chief Economist Philip Lane over the weekend. Lane noted that while the central bank's efforts to reduce inflation back to its 2% target are ongoing, success is not yet assured, and a restrictive monetary policy remains essential. He stressed the need to maintain this restrictive stance for as long as necessary to guide the disinflation process effectively. However, Lane also warned that keeping interest rates high for too long could lead to inflation persistently falling below the target.

In anticipation of upcoming data, TD analysts commented: "Significant base effects in the energy components will likely help headline inflation approach the target in the eurozone. In the Eurozone, the headline rate is expected to drop to around 2.1% year-on-year, while German HICP inflation should fall to 2.2% year-on-year. Core inflation is expected to remain sticky but continue on a disinflationary path."

When is the HICP inflation report scheduled for release, and how might it impact the EUR/USD exchange rate?

The preliminary HICP inflation report for Germany is set to be released at 12:00 GMT. In anticipation of this data, the EUR/USD has recently lost some upward momentum after reaching new 2024 highs slightly above 1.1200 earlier this week.

Markets are currently forecasting around 100 basis points of rate cuts by the US Federal Reserve later this year, potentially starting as soon as September. In contrast, the European Central Bank (ECB) may not follow suit, given recent cautious comments from its officials. The focus has shifted to the economic health of both regions, with the US showing a clear advantage.

If the headline and core inflation data exceed expectations, it could strengthen the case for another ECB rate hike in the coming months, supporting the Euro and potentially extending the EUR/USD uptrend. Conversely, a negative surprise—such as an acceleration of disinflation—might weaken the Euro and lead to a possible downturn in the pair.

Pablo Piovano, Senior Analyst at FXStreet.com, observes that a break above the 2024 high of 1.1201 (August 26) could drive the EUR/USD towards the 2023 peak of 1.1275 (July 18) and potentially the 1.1300 level.

If the EUR/USD faces downward pressure, Pablo suggests initial support may be found at the weekly low of 1.0881 (August 8), which is reinforced by the provisional 55-day SMA at 1.0879, followed by the critical 200-day SMA at 1.0851.

Overall, Pablo concludes that the pair’s positive outlook is likely to continue as long as it remains above the key 200-day SMA.