Markets
EMU May flash CPI data were close to/tentatively higher than expected, rubberstamping expectations for the ECB to raise its policy rate next week by 25 bps. Headline inflation increased 0.1% m/m and 3.2% Y/Y, the first time the measure printed north of 3% since September 2023. Core inflation (2.5% from 2.2%) and the by the ECB closely monitored services inflation (3.5% from 3%) were slightly higher than expected. Food price inflation slowed (0.0% M/M and 2% from 2.4%Y/Y). Energy prices eased slightly in a monthly perspective (-1.1%) but remain substantially higher Y/Y (10.9%). The data hardly changed market expectations on the ECB rate path throughout summer with a June rate hike 95% discounted and a next step in September 90% discounted. Markets currently apparently see two 25 bps ECB rate hikes as a good balance to show determination to clamp down inflation and maintain credibility and at the same time avoid unnecessarily hurting growth. A more aggressive stance might still be needed if the conflict in the Middle East drags on and/or supply disruption filters through deeper and longer than expected. However, maybe for now it’s a bit too early for investors to play this card as long as oil holds south of $100/b. The post-September era in the current environment whatsoever is a very long call. In the meantime, global (interest rate) markets are still ‘conditioned’ by the ‘deal/no-deal’ headline sequence. After a rise in oil, yields and the dollar yesterday on Iran reportedly suspending negotiations due to Israel’s military operations in Lebanon, sentiment today again is a bit milder as President Trump late yesterday suggested negotiations can still continue as he asked Israeli Prime Miniter Netanyahu not to go into a major raid on Beirut. Confusion on the hart of the matter remains high. Even so, hope still was enough for oil to reverse most of yesterday’s rebound (Brent currently $94/b). EMU swap yields in this process also eased back between 2 bps (2-y) and 3.5 bps (10-y). US yields also followed this trend, be it at a distance, easing 1-2 bps. US yields are still a bit less affected by the geopolitical narrative and US data apparently might again have a slightly bigger role to play. Especially if this week’s data (Labour market and ISM’s) show ongoing resilience of the US economy. Combined with inflation further drifting away from target, it reinforces the case for the Fed to leave its easing bias and maybe even to raise its policy rate somewhere further down the down the road. This position today at least was endorsed by Fed’s Hammack. No big moves in the major USD cross rates. EUR/USD hover near 1.165. USD/JPY (159.75) is inching ever closer to the 160 (intervention?) reference.
News & Views
The UK’s Office for Budget Responsibility (OBR) said it’ll take into account the sticky inflation experience from 2022’s energy crunch when it updates its forecasts later this year. Since inflation back then came in higher than the OBR expected, this suggests an upward revision to the projections is likely. The previous set was released on March 3 and hadn’t factored in the Iran crisis yet. The OBR forecasts determine how much leeway the UK government has for public spending while staying compliant with the self-imposed fiscal rules and draw close attention from (bond) markets. The £24bn estimated room for maneuvering is bound to be lower in an unchanged policy scenario.
The ECB in its annual assessment said the euro’s international role had risen moderately in 2025. The euro’s share across a broad set of indicators of international use rose to around 20%, continuing a gradual but steady upward trend observed since Russia’s invasion of Crimea in 2014, the ECB reported. It repeated president Lagarde’s end-May 2025 call for the euro to seize the opportunity to enhance its global appeal. European policymakers to that end need to reinforce the three key pillars that underpin its potential: economic resilience, legal and institutional integrity and geopolitical credibility. The annual report also noted that issuance of international debt in euro reached its highest level since the introduction of the single currency, rising by around 30% compared with 2024 to close to €1tn. In addition, the euro became the leading currency in the green and sustainable international bond market for the first time while foreign portfolio inflows to the euro area were close to historical highs. But the ECB also warned for fragmentation that could hamper the euro’s aspired rise to dominance. Gold, for one, is still being bought in large quantities, with its share in FX reserves even surpassing that of US Treasuries (also due to valuation effects, though). Several countries are also advancing digital technology-based alternatives to traditional cross-border payments. Finally, the central bank stressed that the use of the Chinese renminbi is still low overall but gaining traction in other areas such as daily FX-trading and trade financing.
