Euro retreats from highs as ECB set to slash rates again
|The sharp drop in the Euro Area inflation data for May not only seals the deal for another rate cut from the ECB on Thursday, but almost guarantees that President Lagarde will strike a dovish note that hints at further easing ahead. The disinflation process remains firmly on track. The main inflation measure has slumped below the 2% target for the first time since September (1.9%), while the core rate is also now back at its lowest level in more than three years (2.6%).
Developments since “Liberation Day” should make the Governing Council increasingly confident in achieving its price mandate, with both the recent rally in the euro and the drop in global commodity prices set to keep inflation in check. Moreover, risks to the growth outlook remain tilted to the downside, not least given the uncertainty surrounding US tariffs.
We think that Lagarde will talk up the inflation progress and flag elevated growth risks on Thursday. While she will stop short of providing clear forward guidance on rates, a dovish tone in her remarks, combined with a sizable downgrade to the 2025 inflation projection, would be enough to signal at least one more cut beyond this week’s meeting.
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