Brown Brothers Harriman’s (BBH) Elias Haddad expects Eurozone May Consumer Price Index (CPI) to remain close to the European Central Bank’s (ECB) baseline projections, with risks skewed slightly lower after softer German data. Markets have nearly fully priced a 25 bps hike to 2.25% on June 11. Haddad argues that tightening in a sluggish growth, high inflation setting is not positive for the Euro but should limit EUR/USD downside around 1.1400.

ECB tightening seen limiting Euro losses

“Eurozone May CPI is due Tuesday. Headline and core CPI are expected to rise to 3.2% y/y (vs. 3.0% in April) and 2.4% y/y (vs. 2.2% in April), respectively. Risks are skewed to the downside given the unexpected slowdown in German inflation. More importantly, both Eurozone headline and core CPI inflation are currently tracking closer to the ECB’s March baseline forecast than to its adverse and severe scenarios:”

“Baseline scenario: headline and core CPI to average 3.1% and 2.2% in Q2, respectively.”

“Adverse scenario: headline and core CPI to average 3.6% and 2.3% in Q2, respectively.”

“Severe scenario: headline and core CPI to average 4.1% and 2.4% in Q2, respectively.”

“The swaps curve has virtually fully priced in a 25bps ECB rate hike to 2.25% at the next June 11 meeting. Rate hikes in a sluggish growth, high inflation environment, is not bullish for EUR but should help cushion the downside. We expect EUR/USD to carve out a bottom around 1.1400, reflecting a stronger US growth outlook relative to the Eurozone.”

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