Will EU CPI Shore-Up Consensus or Widen Cracks in Camps?

There are signs of cracks in the ECB's drive to raise rates, and tomorrow's data could either shore up the consensus or widen the cracks further.

ECB Faces Internal Dissent Over Rate Hikes

ECB President Christine Lagarde seems adamant about communicating to the markets that there will be more tightening, with "inflation is too high and for too long" almost becoming her catch-phrase. It mirrors the last interest rate decision statement, with the "northern" hawks pushing for rates to keep rising through September. Dissent has come from the "south", with ECB members Mario Centeno and Francois Villeroy saying that most of the journey in rate hikes has been completed. They don't discount a hike at the next meeting but imply that hikes after that are much more in doubt.

The two camps also differ on interpretations of the data, with the easing side saying that there is "too much emphasis" on core inflation. Headline inflation has been coming down relatively quickly, but the core rate remains stubbornly high and near triple the ECB's target. The hawkish side points to the lack of progress in getting core inflation down as a reason to keep hiking. 

What Does the May Inflation Data Say?

The expectation is that the recent inflation trends will extend in May. Core inflation is expected to come down to 6.5% annually from 7.0% reported in April. But the core rate is forecast to stay relatively stubborn at 5.4%, just two decimals below the 5.6% reported for the prior month. At the same time, the Eurozone is expected to report that the unemployment rate remained steady at 6.5%. Half an hour after the data, Lagarde is scheduled to deliver a speech, which could show the first reaction to the inflation data and how it might affect the ECB's outlook.

The Euro has been on the backfoot to the dollar as investors have, somewhat ironically, piled into the greenback for safety over the US debt ceiling debate. Meanwhile, Germany recently reported that it slipped into a technical recession already. The lack of organic monetary expansion due to sluggish (or even negative) growth could help bring inflation down without the ECB raising rates. With the rest of the world expected to fall into recession later this year, the ECB might not be able to close the rate gap with the US, keeping the shared currency under pressure.

EUR/USD Upside Finished for Now

The EUR/USD pair reversed after printing a wedge at $1.1096 and has since deteriorated in what appears to be a chance at a triple bottom around $1.05. The upward trend seems to be finished for now, with typical corrections leading to the beginning of the wedge, by the said psychological support. 

The downward leg off the peak is impulsive so far (no overlaps between swings), with some respite expected only in case of a bounce at yesterday's low of $1.0673 or a tad lower at $1.0608. If so, bulls will face $1.0748, 83 and eventually $1.09 unless markets attempt to reverse upwardly and we witness a move past $1.0948.

Key TakeawayS

The ECB is facing internal dissent over raising interest rates, with the northern hawks pushing for rates to keep rising through September while the southern members implying that hikes after the next meeting are much more in doubt. The two sides also differ on interpretations of the data, with one side saying there is too much emphasis on core inflation while the other points to the lack of progress in getting core inflation down as a reason to keep hiking. The expectation is that recent inflation trends will extend in May, and ECB President Christine Lagarde is expected to deliver a speech showing the first reaction to the inflation data. The lack of organic monetary expansion due to sluggish growth could bring inflation down without the ECB raising rates.