Eurozone June CPI to determine June ECB hike

Markets are almost certain that the ECB will hike by a quarter of a point next week, with upcoming CPI the only data that could shake those expectations and drive the euro.

Key Points Moving the Market

• Headline Euzone CPI is expected to jump to 3.3%, but core could rise just a decimal to 2.3% as the impact of higher energy prices has yet to enter the broader economy.
• French and German CPI were cooler than expected, which might mean the Eurozone figures miss expectations.
• ECB is widely expected to raise rates next week, but lower inflation could mean a less hawkish outlook late in the year, supporting the EURUSD in the medium term.

ECB Hike Imminent, But Inflation Could Be Cooler

As European consumers grapple with higher costs at the pump, markets are increasingly confident that the ECB will hike as soon as the next meeting to "pre-empt" a rise in inflation. Policymakers have been stung by criticism that they were slow to react to the last inflation bout caused by Russia's invasion of Ukraine in 2022. Rhetoric from ECB officials has increasingly converged on the need to raise rates sooner rather than later to maintain the central bank's inflation-fighting credibility. Last week, Chief Economist Philip Lane echoed several members who have spoken the last couple of weeks warning that inflation will rise in the coming months as higher energy prices filter through the economy. After taking on a data-dependent approach since March, when the conflict in the Middle East upended forecasts, data has suggested growing inflationary pressures even as the economy struggles to gain headway.

The consensus among analysts is that the headline May Eurozone CPI flash reading will show a jump to 3.3% from 3.0%, the highest since the summer of 2023. The core rate, which strips out energy and food prices, is anticipated to rise to 2.3% from 2.2% previously. Markets will be closely watching services inflation, as it has been a key metric cited by the ECB in the past. They are pricing in over a 90% chance that the ECB will hike next week if inflation meets or exceeds expectations. The market is currently more hawkish than economists who predict one rate hike in the summer and just one more before the end of the year. The minutes of the last meeting, in which the ECB held rates unchanged suggested there was already a strong shift towards hiking, with opinions already nearly evenly divided.

Euro Could Gain on a Miss

There are signs that Eurozone inflation could be cooler than analysts expect after French and German data released on Friday painted a mixed picture. The two largest nations in the shared economy printed headline inflation below expectations, as higher energy prices were somewhat offset by slower services growth. Many analysts are concerned that higher energy costs, coupled with higher interest rates, would slow the European economy even further, precipitating demand destruction. As a result, investors might be more reluctant to invest in the euro even if the ECB is hawkish. A beat in Tuesday's inflation number could weigh on the euro, as it implies a slower economy in the future. Meanwhile, a miss could cause the euro to weaken momentarily, but then rally as it suggests that the economy might not be under much pressure.

EURUSD Hints at Pennant Breakout

Price action in EURUSD appears contained between 1.1557 and 1.1761, the VWAP lines, and is currently facing resistance at the middle line near 1.1657. However, before extending to any of these levels, the tightening of the consolidation brings 1.1600 and 1.1700 into focus, suggesting a pennant. Breaking lower would expose 1.1500, while a higher leg could open the door to 1.1800.

Source: SpreadEx | EURUSD, Daily Chart