Euro maintains gains after hot European inflation data

Euro rose in European trade on Monday, maintaining gains against the dollar for the third straight session following strong European inflation data, which renewed pressures on the European Central Bank and hurt the odds of multiple rate cuts this year.

The euro has been trading in a tight range since mid-May, and could be gathering momentum before piercing the psychological barrier of $1.09. 

Now the markets are waiting for the ECB’s policy meeting in the next few days, looking for clues on the future of the eurozone’s monetary policy.

Markets also await the all important US payrolls data on Friday, crucial for gauging the likely path ahead for US interest rates. 

The Pair 

The EUR/USD pair rose 0.15% to $1.0859, with a session-low at $1.0844, after closing up 0.15% on Friday, the second profit in a row following European inflation data. 

The pair rallied 1.7% across May, the first monthly profit in 2024. 

Such monthly gains were underpinned by expectations the ECB will likely hold off raising interest rates in the second half of the year following the expected cut in June. 

European Inflation

Official data showed the eurozone consumer prices rose 2.6% y/y in May, above estimates of 2.5%, and up from 2.4% in April. 

Core prices rose 2.9% in May, up from 2.7% in April.

European Rates

Such data reduced the odds of ECB rate cuts this year from 75 basis points to just 50 basis points. 

The ECB

Later on Wednesday, the ECB will hold its periodic policy meeting, widely expected to cut interest rates by 25 basis points.

ECB President Christine Lagarde will provide fresh clues on the prospects of European rate cuts and policy easing later this yeare. 

Euro Outlook

UBS’s analysts expect the euro to soften this week on profit-taking after strong gains in the past few weeks. 

However, the ECB could surprise us with a bullish stance on future policies, with a potential delay of the timing of the next rate cut, in turn underpinning the euro and sending it above $1.09.