Brown Brothers Harriman’s Elias Haddad writes that mixed Eurozone Consumer Price Index (CPI) data and a fully priced 25 bps European Central Bank (ECB) hike leave the Euro (EUR) under pressure but not collapsing. Haddad argues that rate hikes in a sluggish, high-inflation environment are not positive for the Euro, yet expects EUR/USD to form a bottom around 1.1400, reflecting stronger United States (US) growth versus the Eurozone.

ECB hike priced, Euro still pressured

"Eurozone May CPI was mixed, EUR reaction muted. Headline CPI matched consensus at 3.2% y/y vs. 3.0% in April and tracked closer to the ECB’s Q2 baseline forecast (3.1%) than to its adverse (3.6%) and severe (4.1%) scenarios."

"However, core CPI ran hot at 2.5% y/y (consensus: 2.4%) vs. 2.2% in April and tracked closer to the ECB’s Q2 severe scenario (2.4%) than to its baseline forecast (2.2%) and adverse scenario (2.3%)."

"Worrisomely, services CPI surged to a seven-month high at 3.5% y/y, raising the risk of a persist pickup in inflation."

"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."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)