The Euro Catches a Reality-Check on Inflation Data Release

Eurozone annual inflation is expected to be 1.4% in May 2017 report Eurostat, down from 1.9% in April 2017, according to a flash estimate from Eurostat, the statistical office of the European Union.

The reading is below analyst estimates for a figure of 1.5% to have been delivered and well below the previous month’s read of 1.9%.

Importantly, the Core CPI figure which the ECB has tended to focus on of late, read at 0.9%, below expectations for 1.0%.

On all counts, inflation is moving in the opposite direction to where policy-makers at the European Central Bank (ECB) would like.

"That should allow the ECB to continue to stress that underlying inflation pressure in the euro area remains weak, despite strengthening growth, when it meets next week," says Cathal Kennedy, European Economist at RBC Europe Limited. "As a result, while we see an upgrade of the ECB’s economic assessment as likely, we think that it will maintain its overall dovish stance next Thursday."

Indeed, this data release will go some way in confirming that Mario Draghi’s recent statement that the Eurozone still needing an “extraordinary amount of monetary support” is justifiable.

“The latest figures should give European policymakers the wakeup call it arguably hasn’t needed in recent times amidst Greek debt uncertainty and the threat of turbulent Italian elections which may be earlier than expected,” says Anthony Kurukgy, Senior Sales Trader at Foenix Partners.

Dennis de Jong, managing director at UFX.com does not believe the kind of policy changes Euro bulls are looking for will be forthcoming from the ECB any time soon.

“Today’s CPI reading shows inflation in the EU remained relatively stable, if not a little sluggish, providing justification that Mario Draghi’s monetary policy should remain ultra-loose,” says de Jong.

Both analysts agree that political tensions could even resurface in the coming months, especially in Italy, where an early election could spell bad news for the Euro’s outlook in the coming months.  

For now the impact on the currency appears limited.

The Euro remains the best-performing G10 currency for 2017 to date and trades near multi-month highs against the US Dollar at 1.1187.

Against the under-pressure Pound Sterling the Euro buys £0.8730.