Next Thursday the ECB is meeting and will decide on the next rate increase. The main question right now is whether the decision will be a 25bps hike or a 50bps hike. Don’t forget that earlier in the week inflation data will be released for the Eurozone.

European headline inflation vs come inflation

In a similar move to the US headline y/y inflation, the Euro area inflation is also stepping lower. The high from October last year was 10.6% and March’s print came in at 6.9%. This is still way above target, but moving in the right direction.

However, the core inflation data is far more concerning. Each month the print has been stepping higher. Central banks around the world have been concerned about core inflation and the ECB’s print shows why. Notice how the core is slowly, but surely stepping higher?

The Euro area inflation print comes out on Tuesday and a high core reading will likely concern the ECB. If the headline starts to break its recent stepping lower pattern and the core accelerates above economists’ estimates then should we expect a 25bps or 50bps hike?

Current short-term interest rate pricing sees a 74% chance of a 25bps hike and a 26% chance of a 50bps hike for next Thursday. Watch the inflation data carefully on Tuesday. A big surprise to the upside will push the markets in greater favour of a 50bps hike. The EURGBP pair is currently looking at re-testing the 0.88700 region and watching for a potential breakout of the level marked should the ECB turn more aggressive on Thursday.