Image © European Union, 2025. Photographer: Xavier Lejeune.
But don't expect a boost to euro exchange rates.
Eurozone inflation numbers are in, and there's enough evidence of building price pressures to tip the ECB into an 'insurance' rate hike in June.
Headline CPI matched consensus at 3.2% y/y in May 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, the core and services inflation subsets - which the ECB can control via interest rate hikes - came in on the warm end of expectations.
Core CPI ran at 2.5% y/y (consensus: 2.4%), up from 2.2% in April, putting it closer to the ECB's Q2 severe scenario (2.4%) than to its baseline forecast (2.2%) and adverse scenario (2.3%).
Services CPI surged to a seven-month high at 3.5% y/y, raising the risk of a persistent pickup in inflation.
"A week ahead of the next ECB meeting, this is the expected uptick in inflation that will motivate the central bank to decide on an 'insurance' hike," says Carsten Brzeski, Global Head of Macro at ING. "It would be a symbolic move, stressing the ECB’s determination to act."
Harry Woolman, Global Capital Markets Analyst at Validus Risk Management, says the data all but confirms a rate hike from the ECB on 11th June.
"The last fortnight has seen a growing narrative from policymakers in favour of a move higher in the ECB’s deposit rate, owing to the gradual feed through from inflationary pressures originating in the Middle East," he adds.
On paper, a rate hike in June should underpin the bullish case for euro exchange rates. However, Elias Haddad, Global Head of Markets Strategy at Brown Brothers Harriman, says the euro is unlikely to benefit as the growth/inflation combinations needed to drive currency appreciation aren't aligned.
"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," he says.
The latest Eurozone PMI data for May painted a picture of an economy becoming increasingly unbalanced, with manufacturing still expanding but services deteriorating sharply.
Woolman says a notable slowdown in consumer discretionary spending from elevated price pressures, as well as tightening credit conditions, contributed to the PMI data falling into contractionary territory for the first time since 2024.
The Composite PMI, which combines manufacturing and services, fell to 47.5 from 48.8. That leaves the Eurozone economy firmly below the growth threshold and suggests GDP growth remains under pressure heading into the summer.
The incoming ECB rate hike will add to the growth headwinds, which could limit the single currency's ability to advance.