Euro-zone inflation preview: Core CPI is the key ahead of the ECB – Three scenarios for EUR/USD

Euro-zone inflation has probably cooled down in May.
The data sets the stage for the critical ECB decision two days later.
EUR/USD has room to fall with inflation and core CPI is the key.

Yohay Elam FXStreet

When even the Germans are unfazed by a jump in inflation, EUR/USD also ignores the numbers and returns to its daily grind. That was the case in late April, when the euro-zone consumer price index (CPI) accelerated from 1.4% to 1.7% year over year and core inflation leaped from 0.8% to 1.2%, later updated to 1.3% in the final read.

The moon has an influence on the euro – at least when it comes to inflation numbers in the spring. The lunar cycle determines the date on which Easter falls and the annual changes cause distortions in the data in March and also April. Europeans purchases' of holidays and other products depend on the timing of the holidays and that explains both March's dismal data and April's robust numbers.

The first release for May is already a cleaner read with inflation probably decelerating. The question is: by how much? While the European Central Bank solely targets headline CPI, the focus in recent years has been on core inflation. A previous case when prices had accelerated and even hit the Frankfurt-based institution's 2% was attributed to a leap in oil prices – the ECB was right not to celebrate and CPI eventually dropped alongside energy prices.

Instead, the focus is on Core CPI which excludes volatile energy prices. Underlying inflation has been battling 1% for quite a few years. The ECB's gargantuan efforts – via negative rates and a vast bond-buying scheme – have lifted it from the abyss of 0.6%, but it has not been able to reach 2%, nor "a bit below" – the bank's mandate.

ECB President Mario Draghi and his colleagues will be watching the data quite closely ahead of their June 6th meeting – just two days after the release. They are on course to present a new funding scheme for banks called TLTRO, but a change in their guidance on interest rates may also change – significantly depending on the fresh data.

Three scenarios for Core CPI, EUR/USD, and the ECB

1) Around 1%: Core CPI was moving around 1% in the past year – and that is what markets are probably expecting. Such an outcome would probably leave EUR/USD unchanged, maintaining the gradual downtrend.

2( Fallback: A more sudden deceleration to 0.9% or 0.8% may already depress the euro and reshape expectations toward the ECB decision two days afterward. Investors may speculate on another pushback in its intentions to raise rates – currently set for early next year.

3) Upside surprise: A surprising resilience of inflation with .2% or even 1.3% could catapult the common currency higher – investors may speculate that Draghi could convey a positive message for a change.

Conclusion

Recent euro-zone inflation has been skewed due to the timing of the Easter holiday and May's numbers represent a return to normality. The reaction in EUR/USD rests on core CPI and expectations are roughly at 1%. Any deviation may have an outsized impact due to the timing – two days before the ECB decision.

Euro-zone preliminary inflation figures for May 2019 are published on Tuesday, June 4th, at 9:00 GMT.

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

GBP/USD bounces off lows, back above 1.3200

After bottoming out near 1.3160, GBP/USD manages to regain a bit of shine and reclaim the 1.3200 mark and beyond at the end of the week. Stronger-than-expected UK Retail Sales data seem to be helping the British Pound limit its losses, while the chaotic UK political environment keeps the bulls at bay for now.

EUR/USD looks consolidative around 1.1460

EUR/USD stages a modest rebound after slipping to a three-month low below 1.1420 at the end of the week. That said, the pair now looks to consolidate humble gains just above 1.1460 despite growing uncertainty surrounding the next round of US-Iran negotiations, which keeps the US Dollar’s downside contained.

Gold slips back to six-day lows, targets $4,100

Gold retreats for the third consecutive day on Friday, eroding gains seen in the first half of the week and approaching the key $4,100 mark per troy ounce. Indeed, the precious metal continues to face headwinds from the Fed's hawkish stance and renewed uncertainty surrounding the next round of US-Iran negotiations.

Solana extends correction despite ETF inflows, RWA adoption

Solana (SOL) price edges below $70 extending its losses for the fourth straight day this week. The institutional demand for Solana is building, with steady inflows so far this week and Morgan Stanley’s amended S-1 filing for a Solana-focused Exchange-Traded Fund.

The Iran war didn't break the US economy, but what happens next?

Nearly four months after the start of the Iran war, the US economy remains remarkably resilient. While the conflict initially triggered a severe disruption to global energy markets and a sharp rise in Oil prices, recent diplomatic progress between Washington and Tehran has eased concerns about a prolonged supply shock.

Regime change: Inside Kevin Warsh's first move to make the Fed unreadable on purpose

The rate did not move. That was the least interesting thing about Kevin Warsh's first meeting in charge of the Fed. The FOMC held its benchmark at 3.50%-3.75% for the fourth straight meeting, exactly as priced, and then the new chair used his first press conference to dismantle the machinery the market has leaned on for a decade.