Eurozone Inflation Forecast: Core and headline numbers expected to inch down in May

  • Eurostat will release crucial European inflation data on Friday.
  • Headline inflation is expected to tick higher in May.
  • The European Central Bank remains cautious regarding rate cuts.

The Harmonized Index of Consumer Prices (HICP), a broad measure of inflation in the Eurozone, is set to be released on Friday, May 31. The European Central Bank (ECB) will closely analyze this inflation data amidst renewed doubts regarding the potential start of its easing cycle at its June meeting.

Following a gradual drop of the Consumer Price Index (CPI) in the Euro Area since December 2023, the index seems to have met some decent contention around 2.4% YoY, as per March and April prints.  

In her last comments on April 19, ECB President Christine Lagarde argued that Euro Zone inflation is expected to decrease further and that the ECB might reduce interest rates if its long-standing price growth criteria are satisfied.

Lagarde also emphasized that the ECB Governing Council is not committing to a specific rate trajectory, reiterating the bank’s latest guidance.

She noted that risks to the inflation outlook are two-sided, citing potential upside risks such as increased geopolitical tensions, higher wage growth, and more resilient profit margins than anticipated.

What can we expect in the next European inflation report?

In line with inflation data observed in other G10 countries, the consensus among economists predicts that Core HICP inflation will increase by 2.8% in the year to May, up from 2.7%, while the headline measure is expected to rise by 2.5% compared to the previous year, from a 2.4% increase seen in the prior month.

Supporting the expected uptick in consumer prices, Germany’s preliminary headline Consumer Price Index (CPI) rose by 2.4% over the last twelve months in May, an increase from April’s 2.2% rise.

Back to the ECB, the bank published its Consumer Expectations Survey for the month of April on May 28, where consumers in the region reduced their inflation expectations, coinciding with the bank’s plans to begin rolling back a record series of interest rate hikes. Indeed, expectations for inflation over the next 12 months decreased to 2.9% from 3.0% the previous month, reaching their lowest level since September 2021. Meanwhile, expectations for inflation three years out declined to 2.4% from 2.5%, though still significantly above the bank’s 2% target.

When will the HICP report be released, and how could it affect EUR/USD?

The Eurozone’s preliminary HICP is scheduled to be released at 09:00 GMT on Friday. As this highly anticipated inflation data approaches, the Euro (EUR) is struggling to stay above the significant level of 1.0800 against the US Dollar (USD) in a sustainable fashion, with investors weighing the possibility of the Federal Reserve (Fed) beginning its easing cycle at some point towards year end.

Pablo Piovano, Senior Analyst at FXStreet, notes, “In case the bullish sentiment kicks in, EUR/USD is expected to face initial resistance at monthly peaks near the 1.0900 barrier. The surpass of this region in a convincing mood should allow for a potential move to the March top at 1.0981 (March 8)”.

Pablo adds, “On the other hand, if the selling pressure accelerates, spot might confront the key 200-day SMA at 1.0787 ahead of the May low of 1.0649 (May 1). A deeper pullback could then see the 2024 bottom of 1.0601 (April 16).”

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