The euro slipped below the $1.07 mark as investors tread cautiously amidst mixed inflation figures and an unexpected drop in Eurozone economic sentiment. The STOXX 50 ended in negative territory, while the yield on the 10-year German Bund fell below 2.55%, retracting from its recent five-month high.
Preliminary reports revealed that German inflation remained stagnant at 2.2% year-on-year in April, slightly below the market's expectation of 2.3% year-on-year. This was attributed to a slowdown in service inflation offset by a rebound in food prices and a lesser decline in energy costs due to the expiration of a temporary tax cut on natural gas. The EU-harmonized inflation rate came in slightly higher at 2.4% year-on-year, while core inflation, excluding volatile items like food and energy, decreased to 3.0% in April, marking its lowest level since March 2022. Elsewhere in Europe, Spain's Consumer Price Index rose to 3.3% year-on-year, the highest in three months, albeit slightly below market forecasts of 3.4%.
Despite indications that reaching the 2% inflation target is challenging, an ECB rate cut at the June meeting seems increasingly likely, with money markets pricing in a probability of over 90% for easing. However, the path forward remains uncertain. The recent uptick in inflation in the US is raising concerns about spillover effects in the Eurozone, while higher oil prices and a weaker euro could further elevate inflation expectations domestically. The market's fear of a prolonged period of elevated inflation is only matched by concerns about potential policy missteps. Without a clear necessity for a rate cut, there's a growing argument for a wait-and-see approach.
Today's economic calendar is bustling with activity. German retail sales pleasantly surprised, with April figures surpassing market expectations. Later, the Eurozone will release its initial estimates for Q1 GDP and April CPI, with projections indicating a modest uptick in growth accompanied by a slight easing in core inflation. Any positive surprises could lead to a reduction in expectations for rate cuts in the second half of the year, providing support for the euro. Risk sentiment in EUR/USD leans towards a slight decline, as indicated by the skew in overnight risk reversal, with the possibility of choppiness in trading due to month-end dynamics, albeit less pronounced than usual ahead of the looming FOMC meeting.
