Eurozone CPI Hits Fresh Highs in May
ECB rate hike expectations are back in focus on the back of yesterday’s eurozone inflation data which was seen hitting record highs in May. Flash CPI for the eurozone came in at 8.1%, well above the 7.8% the market was looking for, marking a sharp uptick from the prior month’s 7.5% reading. Core CPI, which strips out the more volatile food and energy readings, rose to 3.8% from the prior month’s 3.5%, beating estimates for a 3.6% reading.
ECB Mulling Larger Hike?
With inflation in the Eurozone soaring, market expectations are now firmly fixed on imminent ECB tightening. Over the last month we’ve an increasing number of ECB policymakers voicing support for a .25% hike in July. However, there is now a growing view that the ECB might be forced to action a larger .5% hike such as we’ve seen elsewhere in the G10 recently.
Upside Risks for Inflation
To put the last inflation reading in perspective, eurozone CPI in June last year was at 1.9%, meaning consumer prices have risen by over 400% in the last year and are now at their highest level on record. While inflation is running away, the ECB faces a difficult task in balancing the need to reign in prices against the need to keep growth alive. With the eurozone economy still transitioning out of the pandemic, as well as dealing with the downside impact of the Russian invasion of Ukraine, recessionary risks loom large on the horizon.
North/South EU Divide Creating Tension
The issues around raising rates in the eurozone are familiar. On the one hand, northern EU banking chiefs are calling on the need for faster and more aggressive action from the ECB while southern banking chiefs fear the impact such hikes will have on their more indebted nations. However, with recent data making it clear that underlying prices are now being impacted (diluting the view that the inflation spike is transitory), the need for ECB action is clear. With this in mind, there are clear upside risks into the coming June 9th ECB meeting.
Technical Views
EURUSD
The correction higher in EURUSD has seen the market breaking back into the middle of the larger bear channel. Price is currently being capped by the 1.0775 resistance level. However, with both MACD and RSI bullish here, the focus is on a further move higher near-term towards 1.0885 which will be a key test for the pair. To the downside, 1.0653 is the initial support to watch above the bear channel low and 1.0511 level.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.