Soft Eurozone Inflation Raises Prospects of Extra ECB Rate Cuts

Eurozone inflation for May was shown to have fallen to 1.9% via a flash estimate, below the 2% figure expected and the 2.2% prior inflation reading. Whilst the sub 2% CPI print probably won’t change the calculations much for the ECB (European Central Bank) meeting this week, where they are expected to cut rates by 25bp’s, it does raise the prospect of seeing potentially another two cuts between now and year-end (which would leave the benchmark EU lending rate at 1.5%).

Whether we get a further one or two cuts from the ECB (following an assumed rate cut this week) could hinge on how productive or otherwise the EU-US trade negotiations go between now and the July 9th deadline. However, if Eurozone inflation continues to trend lower at the current rate, additional monetary policy easing by the ECB could leave the Euro vulnerable to a possible yield-inspired rebound by the Dollar if the Fed is less aggressive on easing rates.

Regarding the USD, the Dollar Index (DXY) has staged a mild turnaround from its slump towards 98.50 earlier this week. Stronger than expected US JOLTS job openings data for April showed that the labour market was holding up better than feared despite ongoing tariff worries. This piece of macro data combined with the softer EU inflation print prompted the DXY to find its way back above 99.20. Resistance at 99.54 would need to be cleared before any potential run back towards the 100 level. But with US-China trade negotiations not going particularly smoothly (maybe this will change if President’s Trump and Xi have a pleasant phone call), and US tariffs on steel and aluminium doubling to 50%, the USD remains susceptible to the prevailing negative sentiment towards US assets.

Gold eased back from its highs in response to the Dollar rebound. Geopolitical tensions and heightened US-China trade tensions had seen gold make an approach towards $3400 (topping out at around $3392) however stronger US macro data in the form of the JOLTS data in conjunction with the turnaround in the USD caused gold to take a moderate pullback. The price was trading around $3356 early in Asian trading hours on Wednesday, with resistance at $3390 acting as a barrier for a potential run beyond $3400 for the precious metal. Support awaits at $3328 and $3300. Where gold heads from here will depend on what sort of trade headlines we see (again, with a possible Trump-Xi call swaying market sentiment) and how resilient US jobs data is. If we do happen to see solid US labour market numbers when the ADP (i.e. private sector US jobs data) and NFP (Non-Farm Payrolls) data is released, the USD could be staring at more upside which could see gold slip lower.

‍

Oil has been on the up this week. US crude made a push above $63 with Ukraine’s attacks on Russian airfields being a sign of escalation and raising supply concerns. Meanwhile, lack of progress between the US and Iran regarding nuclear talks have decreased the chances of seeing additional Iranian crude supply entering the market, which has supported the price. Also, OPEC+ did announce they will be increasing production again in July; however, the size of the increase was within market estimates which therefore didn’t create any push lower in the crude price. For US crude, support is at $62.10, $61.30 and $59.90, with resistance at $63.50 and $64.10. Risk premium resulting from geopolitical conflicts is currently underpinning the crude price despite economic uncertainty regarding the global energy demand picture (largely due to US tariffs).

‍

Looking ahead, US Non-Farm Payrolls (NFP) is the key event on the economic calendar. The US economy is expected to have created approximately 135k jobs in May, which would be down from the 177k figure in April. Traders are still sensitive to any potential adverse economic effects from the ongoing US trade wars, so any upside surprise in the data could show that the US economy is weathering the tariff uncertainty better than feared. Let’s see what the jobs numbers show.

‍