The first business week of May was busy, despite the start of the holiday. The FED and ECB will announce their rate cut, and Australia’s RBA has already surprised markets with an unexpected hike.
In addition to central bank announcements, other economic data is of interest to traders. For example, Nonfarm payrolls in the United States are accessed on Friday hours.
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For these euro traders, the focus until Thursday’s ECB meeting was on the April inflation data. Inflation in the eurozone has risen to 7% year on year, but the market has already discounted it.
What was surprising was core inflation in the eurozone. It moderated slightly, but still slightly, in April, from 5.7% to 5.6%.
Not much, but within the peak though. Therefore, the ECB is likely to raise just 25bp on Thursday as a drop in core inflation is a sign that higher rates are making their way into the economy.
The ECB will move more cautiously from here
Food, alcohol and tobacco presented the highest annual rate in April. Non-energy industrial goods remained a close second.
But core inflation, which excludes energy and food prices, is rising. Hence it is clear that the transmission is working at higher rates and that the pin may be present.
In other words, the ECB will most likely not move the rates policy on Thursday by 50bp, but only by a quarter of a percentage point. As such, sellers of the Euro should find it, as it did today, when EUR/USD dropped above 1.10 to the 1.0950 area, sending inflation falling.
All in all, the inflation data is bearish for the euro, as the stock market starts to see fewer gains from the ECB hikes. The Euro may fall further depending on the tone the ECB uses on Thursday.
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