Brown Brothers Harriman’s (BBH) Elias Haddad anticipates that the Eurozone's May Consumer Price Index (CPI) will remain close to the European Central Bank's (ECB) baseline projections, with risks slightly tilted to the downside following softer-than-expected German inflation data [1]. The headline and core CPI for May are forecasted to rise to 3.2% year-over-year (from 3.0% in April) and 2.4% year-over-year (from 2.2% in April), respectively [1]. These figures are tracking nearer to the ECB’s March baseline scenario, which projected headline and core CPI to average 3.1% and 2.2% in Q2, as opposed to the adverse (3.6% and 2.3%) or severe (4.1% and 2.4%) scenarios [1].
Market participants have nearly fully priced in a 25 basis point ECB rate hike to 2.25% at the upcoming June 11 meeting, as reflected in the swaps curve [1]. Haddad notes that while tightening monetary policy in an environment of sluggish growth and high inflation is not supportive for the Euro, it should help limit EUR/USD downside, with expectations for the currency pair to find a bottom around 1.1400 [1]. This outlook is underpinned by a stronger US growth outlook relative to the Eurozone [1].
No specific analyst opinions or forward-looking statements beyond Haddad’s expectations for EUR/USD and the ECB’s policy path are provided in the article [1].
CONCLUSION
The Eurozone's May CPI is expected to align with the ECB's baseline projections, with downside risks due to weaker German inflation. While a 25bps rate hike is nearly fully priced in, the Euro is likely to see its downside cushioned, though not supported, by ongoing policy tightening in a sluggish growth environment.