Euro area core inflation eased in April – is it time to sell the euro?

The first trading week of May is busy, despite starting with a holiday. The Fed and the ECB will announce their interest rate decisions, and the RBA in Australia has already surprised markets with an unexpected rate hike.

Besides the central banks’ announcements, other economic data is interesting for traders. For example, the Non-Farm Payrolls in the United States are scheduled on Friday.

For those trading the euro, the focus until the ECB meeting scheduled on Thursday was on April inflation data. Inflation in the euro area increased to 7% YoY, but the market had already priced it in.

What surprised was the core inflation in the euro area. It eased slightly, but nevertheless, it eased slightly in April, from 5.7% to 5.6%.

Not much, but the peak may be in. Therefore, it is likely that the ECB will hike only by 25bp on Thursday, as the decline in the core inflation is a sign that higher rates are making their way into the economy.

ECB to move more cautiously from here

Food, alcohol, and tobacco had the highest annual rate in April. Non-energy industrial goods followed in a close second position.

But the core inflation, the one that excludes energy and food prices, declined. So it is evidence that transmission from higher rates is working and that the peak may be in.

In other words, the chances are that the ECB will not hike the key interest rates by 50bp on Thursday, but it will only hike a quarter of percentage points. As such, the euro should find sellers, as it did today, when EUR/USD dropped from above 1.10 to the 1.0950 area when inflation was released.

All in all, the inflation data is bearish for the euro as the market begins to price in fewer rate hikes from the ECB. The euro may decline even further depending on the tone the ECB will use on Thursday.