The eurozone inflation print on May 31 moved to new highs at 8.1%. This was at the top end of Reuters analysts’ estimates and higher than the prior reading. You can also see that the m/m print was high at 0.8% over the 0.1% expected and the 0.6% prior. It is clear that inflationary pressure is building.

This increases the pressure on the ECB to act more decisively against surging inflation.

High oil prices make inflation pressure things worse

China’s re-opening and a tight oil market have been turbocharged by the EU Russian oil embargo. This has sent oil even higher and this will further increase inflationary pressure. When energy prices rise this just means that everything costs more to produce, to move, and that makes the inflationary pressure worse.

So, could the ECB hike in June?

On paper, no. Christine Lagarde has set market expectations for one 25 bps hike in July and one in September. There have been some ECB hawks talking of a 50 bps rate hike, but the short-term interest rate markets are pricing in a 53% chance of an ECB hold. The other way of looking at this is that there is a 47% chance of a hike on June 09. This means that it is probably a coin flip whether the ECB does or doesn’t.

Which currency to trade the EUR against?

In the event of a hawkish tilt, traders would look to pair the euro with a weak currency. The obvious candidate remains the GBP with the BoE tailing about stagflation and a 2023 negative GDP outlook. The other option would be the USD, but on condition that the Fed does not turn even more hawkish on growing inflationary pressures. The latest falls in the US Core PCE print bodes well for a peak USD outlook. Key levels on the EURUSD are noted oon the chart below which can be decent reference points.