Inflation Falls Sharply

The latest set of eurozone inflation figures released this morning make for more encouraging reading for the ECB. Annual headline and core CPI were both seen falling last month. The flash estimate for May showed headline inflation falling to 6.1% from 7% prior, below the 6.3% the market was looking for. On the core reading, prices were also seen dropping down to 5.3% from 5.6% prior, below the 5.5% the market was looking for. While these readings are clearly still well above the bank’s target, the trajectory of inflation is at least moving firmly in the right direction and, with that in mind, tightening expectations for the ECB are starting to come off accordingly.

Hawkish ECB Comments

Various ECB members recently, including Lagarde herself have warned that the ECB will need to continue ahead with rate hikes while inflation remains at elevated levels. Furthermore, many project that rates will need to stay at elevated levels for longer in order to drive inflation down. In light of these comments, the market is widely expecting a further hike this month. However, traders will be keen to see if there is any softening in the bank’s outlook on the back of these latest readings.  If seen, this could drive EUR meaningfully lower near-term.

Technical Views

EURUSD

The reversal lower in EURUSD has seen the market breaking down below the bull channel lows and below the 1.0785 level support. With momentum studies turned bearish, the focus is on a further push lower while below this level targeting 1.0515 next. Bulls will need to see a convincing move back above 1.0785 near-term to take the pressure off.