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Euro Area Inflation Unlikely to Change ECB’s Outlook

  • ECB June rate move looks like a done deal
  • May inflation could open the door to a July rate cut
  • Euro could benefit from a stronger CPI print
  • German CPI on Wednesday, eurozone report on Friday at 09:00 GMT

Busy calendar, inflation stands out

With the market counting down to next week’s ECB meeting, the preliminary inflation report for May will be published this week. The data calendar is rather full and includes unemployment data for the eurozone and the German retail sales, but the focus will be firmly on inflation.

The various German states will start reporting their respective inflation data from 08:00 GMT on Wednesday with the German aggregate print expected at around 12:00 GMT. The market is currently expecting a small acceleration to 2.4% yoy from 2.2% in April. Then, on Friday, the euro area headline figure is forecast to edge slightly higher to 2.5% with the core indicator that excludes energy, food, alcohol and tobacco remaining at 2.7%.

The euro area economy is picking up pace

Based on the recent economic data, the economic recovery is gaining speed in the euro area. More specifically, the upside surprise in the GDP for the first quarter of 2024 has been followed by stronger business survey prints. Last week’s preliminary PMI reports and Monday’s IFO business survey from Germany confirm this trend change.

This apparent economic improvement has been noted by the ECB members, but their overall rhetoric has not been moderated. Essentially, since the April 11 meeting, ECB officials have been focused on preparing the market for the June 6 rate cut. While the ECB does not precommit, this rate cut could be the one of the most telegraphed rate moves in the history of the ECB.

June rate cut is a done deal; focus on the July meeting

The discussion has gradually moved to the July meeting’s outcome. The doves are clearly advocating for consecutive rate cuts, assuming that the June meeting results in a 25bps rate move. This week’s inflation report will play a key role in the behind-the-door discussions and the overall rhetoric at the imminent ECB meeting regarding the ECB’s outlook for the rest of 2024.

A strong inflation report, for example, if the euro area headline inflation accelerates aggressively above 2.5% and the core indicator jumps above 3%, is unlikely to change the strong expectations for the June gathering. However, it could significantly dent the growing chances of back-to-back rate cuts.

On the flip side, a weaker inflation report will just act as confirmation of the June rate decision and keep the July rate cut option firmly on the table.

Euro needs a strong inflation report

Despite the evident economic divergence between the US and the euro area, the euro has been on the front foot against the US dollar over the past month. However, this bullish trend has stalled lately as the stronger US data releases are raising doubts about the realistic possibilities of the Fed cutting rates in 2024.

All in all, this week’s eurozone preliminary inflation report is unlikely to change the medium-term outlook for the euro. Having said, if inflation surprises on the upside, we could see some upwards pressure on euro/dollar towards the 1.0900 area. On the other hand, a weak inflation report could open the door to a move below the busy 1.0773-1.0809 area, which is currently acting as very strong.

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