Euro edges lower as German inflation accelerates

The euro is quiet on Wednesday. EUR/USD is trading at 1.0840 in the North American session, down 0.14% on the day.

German inflation rises to 2.4%

Germany’s inflation rate rose to 2.4% y/y in May, following a 2.2% gain in each of the past two months. The reading was in line with expectations, which explains the euro’s muted reaction. This is the first time in five months that German inflation has accelerated, with the increase driven by higher services and food prices. On a monthly basis, inflation rose just 0.1%, sharply lower than the 0.5% gain in April and below the market estimate of 0.2%. Core CPI, which excludes food and energy held steady at 3.0%.

The higher-than-expected inflation report is an indication that inflationary pressures are alive and well in Europe’s largest economy. Eurozone CPI, which will be released on Friday, is expected to follow suit and tick higher to 2.5% y/y, compared to 2.4% in April.

The European Central Bank will be carefully monitoring the eurozone CPI report, which comes less than a week before the ECB’s rate meeting. The central bank has signaled that it will lower rates at the June 6th meeting. Earlier this month, ECB President Christine Lagarde said last week that there was a “strong likelihood” of a rate cut in June and stated that she was confident that inflation was under control. On Monday, ECB Chief Economist Philip Lane said that the ECB was ready to cut rates next week “barring major surprises”.

Interestingly, this would mean that the ECB will lower rates ahead of the Federal Reserve, which is not expected to cut before September at the earliest. The Fed is usually a leader on rate policy, but high inflation in the US has delayed plans to lower rates. This could have unfavorable ramifications for the ECB, as the euro would likely depreciate after an ECB cut, which would raise the risk of a rise in inflation.

EUR/USD Technical

• EUR/USD is testing support at 1.0845. Below, there is support at 1.0806
• There is resistance at 1.0886 and 1.0925

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