Euro Area Inflation Up to 7.0% Adding More Pressure on the ECB

It was another busy day on the European economic calendar. Ahead of the European opening bell, car registrations for France, Germany, and Italy drew interest. However, the numbers are unlikely to influence the ECB’s monetary policy outlook. In contrast, the finalized euro area inflation figures for April were significant.

The Eurozone annual inflation rate accelerated from 6.9% to 7.0%, while the core inflation rate softened from 5.7% to 5.6%. Both figures were in line with prelim numbers.

According to Eurostat,

• Luxembourg registered the lowest annual rate (2.7%) compared with Latvia (15.0%), which had the highest inflation rate.
• Food, alcohol, & tobacco (+2.75 percentage points) had the highest contribution, followed by services (+2.21 pp), non-energy industrial goods (+1.62 pp). and energy (+0.38 pp).

Sticky core inflation will remain a near-term issue for the ECB. This week, the European Commission revised its inflation and growth forecasts for 2023 and 2024. Considering the April inflation numbers and the latest projections, more interest rate hikes may be on the table.

The European Commission raised its euro area economic growth forecast from 0.9% to 1.1% in 2023 and 1.5% to 1.6% in 2024. While the markets welcomed the upward revisions to growth forecasts, the European Commission also revised upwards inflation projections for 2023 and 2024.

The EU Commission expects an annual inflation rate of 5.8% in 2023 and 2.8% in 2024 and for core inflation to average 6.1% in 2023 before softening to 3.2% in 2024.

Earlier today, German car registrations tumbled by 27.9% in April, with car registrations in Italy and France falling by 25.2% and 27.5%, respectively.

EUR/USD Reaction to Euro Area Inflation

Ahead of the inflation numbers, the EUR/USD rose to a pre-inflation report high of $1.08738 before falling to a low of $1.08280.

However, in response to the inflation numbers, the EUR/USD fell from $1.08292 to a session low of $1.08206.

This morning, the EUR/USD was down 0.37% to $1.08218.

Next Up

Investors should track ECB commentary throughout the day. Sticky inflation numbers could fuel more hawkish chatter. ECB Executive Board members Frank Elderson, Fabio Panetta, and Luis de Guindos are on the calendar to speak today.

Looking ahead to the US session, it is a relatively quiet day on the US economic calendar.

The US housing sector will be in the spotlight, with building permits and housing start numbers in focus.

While investors can consider the housing sector a litmus test of the US macroeconomic environment, the Fed’s focus on inflation and labor market conditions should limit the impact of the numbers on the global financial markets.

With the US economic calendar on the light side, investors should track FOMC member chatter with the media. Fed Chair Powell speaks on Friday, and some members may lay the foundations for the Powell speech.

Beyond the economic calendar, US debt ceiling-related news will influence.