Euro-Dollar: Inflation, GDP Data Prompts Hawkish Rethink of ECB Rate Outlook

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The Euro to Dollar exchange rate rallied towards 1.0750 after firm economic and inflation figures from the Eurozone showed there was no need for the European Central Bank to slash interest rates.

 The markets fully expected an ECB rate cut in June, but the odds of a July cut were lowered after Eurozone inflation stayed steady at 2.4% y/y in April. Core inflation came in at 2.7%, above the 2.6% the market was looking for.

Eurostat said Eurozone GDP grew 0.3% quarter-on-quarter in Q1, recovering from Q4's -0.1% and beating expectations for 0.1% growth.

The figures helped the Euro-Dollar rate rise back above 1.07, and the rally looks to be on course to test the 1.0750 area.

What matters for the Euro going forward will be the number of subsequent follow-up rate cuts the ECB delivers after the June kick-off.

These figures suggest that the scope for a rapid succession of cuts has diminished, which is ultimately supportive of Euro exchange rates.

"Today's inflation data is a warning that the ECB will likely be careful with rate cuts and may take time to normalise rates. With an economy showing signs of picking up and unemployment at record lows, the ECB can afford to do so," says Bert Colijn, Senior Economist for the Eurozone at ING.

The Euro's gains against the Dollar are not yet convincing enough to suggest a turn in trend is underway and the Euro will likely be viewed as a sell on any strength.

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"The bounce in the euro on the back of this report has hit some resistance at $1.0725, and it does not change the overall picture for the single currency: it remains in a tight range between $1.0600 and $1.0750. This trading range is the lowest level since Oct/ Nov 2023," says Kathleen Brooks, an analyst at XM.com.

Focus for Euro-Dollar now turns to the U.S., where we have the Federal Reserve decision on Wednesday and the jobs report on Friday.

A 'hawkish' sounding Fed and another above-consensus non-farm payroll report will potentially stop the Euro-Dollar's recovery dead in its tracks as the Euro yields to 2024's top-performing currency.