The euro headed for its third successive decline against the pound sterling on Friday, with the EURGBP pair rising sharply at 0.8531, notching a 0.26% gain.
Robust Inflation Data Shifts Market Sentiment
Inflation data from the Eurozone, both headline and core HICP, exceeded forecasts. This unexpected surge in inflation figures has shifted market expectations, moving away from the previously dovish view of the European Central Bank (ECB). While a cut in June by the ECB seems already priced in, these hot inflation figures may impact the timing of the rest of the easing cycle.
The inflation trend witnessed in the Eurozone is a critical driver dominating the FX markets, overriding the ECB’s dovish undertone. Spain’s HICP data further influenced the pair’s gains, coming in a tick higher than expected at 3.8% YoY against the previous 3.4%. Germany’s HICP harmonised inflation rate also picked up to 2.8% YoY, outpacing April’s 2.4%. Similarly, the EU’s block figures rose by 2.6% YoY for headline and 2.9% for the core measure, both beating expectations.
These figures indicate unanticipated inflation pressures, potentially nudging the ECB to reconsider its dovish stance. In that sense, the talk in the next sessions will be on how aggressively the bank will take the easing cycle, following a 25 bps cut already priced in June.
Later in the day, data is expected to show the U.S. personal consumption expenditures (PCE) index, excluding food and energy prices, rose 2.8% in April, matching the increase in March. Month-on-month, core PCE is expected to have risen 0.3%, according to a Reuters poll.
