EU inflation data spoils ECB dovish expectations

The euro headed for its third successive decline against the pound sterling on Friday, with the EURGBP pair rising sharply at 0.8531, notching a 0.26% gain.

Inflation data from the Eurozone, both headline and core HICP, exceeded the forecasts. A cut in June by the ECB seems already priced in, but hot inflation figures may impact the timing of the rest of the easing cycle.

EURGBP is riding high on robust European Union inflation data, surpassing expectations and shifting market expectations away from the dovish view of the European Central Bank.

The inflation trend witnessed in the Eurozone is a critical driver dominating the FX markets, overriding the ECB’s dovish undertone.

Spain’s HICP data further influenced the pair’s gains, coming in a tick higher than expected at 3.8% YoY against the previous 3.4%.

Germany’s HICP harmonised inflation rate, too, picked up to 2.8% YoY, outpacing April’s 2.4%. Similarly, the EU’s block figures rose by 2.6% YoY for headline and 2.9% for the core measure, both beating expectations.

These figures indicate unanticipated inflation pressures, potentially nudging the ECB to reconsider its dovish stance. In that sense, the talk in the next sessions will be on how aggressively the bank will take the easing cycle, following a 25 bps cut already priced in June.

Later in the day, data is expected to show the U.S. personal consumption expenditures (PCE) index, excluding food and energy prices, rose 2.8% in April, matching the increase in March, while month-on-month, core PCE is expected to have risen 0.3%, according to a Reuters poll.

(Source: OANDA)