Euro at Risk as Soft Inflation Data Sets the Stage for ECB Stimulus

Talking Points:

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  Euro May Face Added Selling Pressure on Soft Eurozone Inflation
  


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  US Factory Orders Data May Surprise Higher, Boosting US Dollar
  


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  Aussie Dollar Edges Upward on Chinese PMI as RBA Holds Rates
  

The preliminary set of May’s Eurozone CPI figures headlines the economic calendar in European trading hours. The headline year-on-year inflation rate is expected to register at 0.6 percent, down from 0.7 percent recorded in the prior month. News-flow from the currency bloc has proven increasingly disappointing relative to economists’ forecasts in recent months. Indeed, one such release was May’s German CPI print released yesterday. That seems to opening the door for downside surprise, an outcome that may amplify ECB stimulus speculation and weigh on the Euro. We remain short EURUSD.

Later in the day, the April’s US Factory Orders report. Forecasts point to a 0.5 percent increase, marking a slight slowdown from the 0.9 percent gain recorded in the prior month. US economic data has increasingly outperformed relative to expectations since early April however, hinting analysts are underestimating the recovery’s vigor and opening the door for an upside surprise. Such a result may help scatter any lingering doubts about the approaching end of Fed QE asset purchases and subsequent tightening. Needless to say, such a turn of events is likely to bode well for the US Dollar.

The Australian Dollar edged higher following a policy announcement from the Reserve Bank of Australia. Governor Glenn Stevens and company offered nothing to upset status-quo policy expectations, signaling once again that they believe a period of stability in the benchmark lending rate is warranted. With that in mind, the Aussie’s gains seem to have less to do with the rate decision’s substance and more a function of its conclusion. Having put the day’s critical event risk behind them, traders may have felt free to respond to an upbeat Chinese Non-manufacturing PMI print earlier published earlier in the day. The report showed the pace of service-sector activity growth hit a six-month high in May.

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— Written by Ilya Spivak, Currency Strategist for DailyFX.com

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Euro at Risk as Soft Inflation Data Sets the Stage for ECB Stimulus