EUR Recovers to $1.0850 as Eurozone Inflation Surpasses Expectations

Euro Extends Rebound Amid Inflation Concerns: The euro gained toward the $1.0850 mark, extending its rebound from the two-week low of $1.08 reached. This movement is driven by higher-than-expected inflation in the Eurozone, adding uncertainties over the ECB’s rate cut path this year.

Eurozone Inflation Data: Headline inflation in the Eurozone increased more than expected to 2.6% in May, while the core inflation rate jumped to 2.9%, further rebounding from last month’s low. The higher-than-expected inflation highlights the complexity of the ECB’s task as it balances the need to address inflation with the broader economic conditions across the Eurozone.

ECB Policy Implications: Although the inflation data is unlikely to prevent the ECB from cutting rates for the first time this cycle at its meeting next Thursday, it may cause policymakers to exercise more caution regarding further interest rate cuts in the coming months. ECB policymakers have emphasized the need to remain data-dependent and have refrained from committing to a predefined rate trajectory.

US Dollar Index: The US Dollar Index is relatively unchanged for the week after Wednesday’s rally and Thursday’s correction. The correction was driven by slower-than-expected US Q1 GDP growth, with revised estimates showing the economy expanded at 1.3% compared to the initial estimate of 1.6%.

Upcoming US Core PCE Inflation Data: Investors now turn their focus to the US core Personal Consumption Expenditure (PCE) Price Index data for April, which is due later today. The core PCE inflation is projected to have grown by 0.3% month-on-month and 2.8% year-on-year. A steady or higher inflation reading could lead traders to reduce expectations for Fed rate cuts in September, whereas softer figures might have the opposite effect.

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