US CPI and EU GDP's Implications for EURUSD

US inflation is expected to stabilise as the EU is set to confirm a slight improvement in the shared economy.

The Big Event

There is significant anticipation ahead of tomorrow's release of US CPI data following the weak April NFP as it led to speculation that inflation drivers may be easing. However, consensus forecasts indicate inflation will remain above comfort levels, so hope for easing will likely remain just that unless there is a meaningful downside surprise.

Over recent months, headline inflation has crept higher, prompting a reevaluation of the Fed's stance. However, during the same period, core inflation continued its gradual decline. So has core personal consumption expenditures, the Fed's preferred inflation measure.

Given recent high crude oil prices due to Middle East tensions, the higher headline inflation may be transitory, and the underlying trend in core inflation could continue downward.

Inflation remains above the Fed's target, implying that a cut may not occur for several months even if inflation trends in the right direction. In recent months, core inflation has declined by around 0.1% per month, suggesting it may be over a year before it reaches the target rate.

​Potential Reaction

Headline inflation for April is expected to remain unchanged at an annual rate of 3.5%, thanks to a slowing monthly rate to 0.3% from 0.4% prior. This coincides with a brief increase in gasoline prices that has since subsided slightly, indicating inflation may soon decrease. Core CPI annual change is projected to decline to 3.7% from 3.8% prior, as its monthly rate is also expected to fall to 0.3% from 0.4%.

However, a reacceleration in the economy could push in the other direction even as markets consider lower interest rates. The Fed's GDPNow forecaster upgraded its growth projections for the current quarter to an annual rate of 4.2% from 3.3% previously despite weaker jobs data.

Meanwhile, the Euro Area will review its first quarter GDP figure, broadly anticipated to confirm the initial 0.4% growth reading (to make it comparable, an annualised rate would be around 1.2%). This is seen as a key data point the ECB awaits to decide whether to consider easing when it meets in June, with stronger growth potentially providing some flexibility to delay action.

The divergence in growth rates between the two largest global economies has weakened the Euro versus the US dollar. However, this could change with an upward revision to Euro Area GDP or missed US inflation forecasts.

EURUSD

The EURUSD pair appears to be developing an upward correction pattern, either in the form of a broadening wedge indicating further increases or a flag pattern implying a reversal. In the first scenario, prices may rev past 1.081 towards 1.0885 if the 1.0724 proves to be a bottom. In the second scenario, a break below that support level could see prices decline to 1.0649.

Source: SpreadEx / EURUSD

Key Takeaways

US inflation is expected to stabilise according to consensus forecasts. However, markets will watch tomorrow's CPI data closely for surprises as speculation of easing inflation drivers followed weak April jobs data. Meanwhile, the EU economy is set to confirm a slight growth of 0.4% in the first quarter. Stronger growth in either region could impact inflation and monetary policy expectations, impacting EURUSD.