ECB guidance, flash PMIs to test global disinflation
A broadening disinflation wave sets the stage for a pivotal week where ECB forward guidance and July flash PMIs will determine the trajectory of global monetary policy.
Global markets enter a critical week dominated by the European Central Bank’s latest policy decision and July flash PMIs, which will test whether a widening disinflationary trend justifies further tightening.
Producer and consumer prices are falling across major economies. German PPI is expected to drop 0.2% month-on-month, while Canada’s CPI is forecast to post an identical contraction. In the UK, headline CPI is projected to ease to 2.7% year-on-year with core inflation at 2.5%, moving closer to the Bank of England’s target ahead of its August 6 meeting.
The ECB is virtually certain to hold its deposit rate at 2.25% on Thursday, with prediction markets pricing a 90% probability of a pause. The actual market-moving event will be President Christine Lagarde’s press conference. Markets currently price a 70% chance of a September hike, meaning her language regarding core versus headline inflation will dictate whether the June hike was an isolated move or the beginning of a cycle.
Flash PMIs on Friday will provide the first snapshot of July activity. Eurozone services are forecast at 49.8, hovering near contraction, while US manufacturing is expected to remain resilient at 54.5. European sentiment, however, is recovering. The German ZEW index is forecast to jump 5 points to 15.7, marking the sharpest monthly improvement since early 2025 as the energy shock fades.
Emerging markets face their own inflection points. Colombia’s second-quarter GDP will reveal if the economy can sustain growth under the central bank's restrictive rates. The South African Reserve Bank holds Thursday with inflation at 4.5%, while Mexico releases early July inflation data. In Asia, New Zealand's second-quarter CPI is forecast to accelerate to 4.0%, a development that would constrain the Reserve Bank of New Zealand.
The overarching question for investors is whether the fading oil shock has revealed underlying economic strength or weakness. The ECB's guidance and Friday's PMIs will provide the answer.
