EUR: Downside risks into the weekend
Medium-term consumer inflation expectations in the eurozone continued to ease in May, with the 12-month expectation gauge declining from 4.1% to 3.9%. However, long-term (three-year) inflation expectations – arguably of greater interest for the European Central Bank - remained unchanged at 2.5%, well above the bank’s 2% target. When taking June’s flash core CPI estimates on board, the ECB hawks hardly lack arguments to continue tightening.
Today, the eurozone calendar is very light, and EUR/USD will trade in line with the dollar's reaction to US data. We suspect the pair is facing some downside risks in the latter part of the year after the FOMC minutes set the bar quite high for data to convince markets to price out Fed rate hikes. There is still a gap to be filled (around 20bp) between the Fed communication (dot plots) and the market pricing, while the ECB’s communication is pretty much matched by the EUR OIS curve, which currently embeds two hikes by year-end. EUR/USD could slip below 1.0800 before the end of the week, if US data were to come in on the strong side.
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