Eurozone inflation expectations fall, narrowing ECB opportunity to ease rates further
Eurozone inflation continues its slow descent towards the ECB’s target, which is now actually quite close. Inflation expectations are also falling, which means there is limited room for the Governing Council to cut rates further - though probably no more than a single additional cut, as rates at 2% are already quite stimulative.
As the rate cutting cycle comes to a close, the main driver for the common currency will be the gap in economic performance with the US on the one hand, and the endgame of trade with the US on the other.
We expect to see some news on the latter in the coming days. Trump’s 50% tariffs aimed at the European Union, originally set to come into force on 9th July, will now not take effect until 1st August, which offers a degree of flexibility.
Speeches from a handful of ECB officials, including members Lane, de Guindos and Nagel, will also be closely watched.
Author
Matthew Ryan, CFA
Ebury
Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.
