Euro-area consumer prices jumped 3.2% in May, topping 3% for the first time in three years, fueling bets that the ECB will delay interest rate cuts and propelling EUR/USD higher.
Euro-zone inflation topped 3% for the first time since 2023, boosting the euro as markets scaled back ECB rate-cut expectations, propelling EUR/USD above 1.10.
EUR/USD jumped to 1.1050, gaining 0.8% on the day.
A hawkish shift could push EUR/USD towards 1.12, but a lot depends on US data.
Higher inflation expectations led traders to sell German bunds, pushing the 10-year yield up as markets priced a slower ECB easing cycle.
The yield climbed 10 basis points to 2.65%, the highest in a month.
Short-term, rising yields signal selling pressure, but a slower ECB could cap long-term losses.
A stronger euro weighed on the dollar index, as EUR/USD accounts for over half of DXY; the inflation surprise in Europe contrasted with a mixed US outlook.
The euro makes up 57.6% of DXY, so a strong euro directly depresses the dollar index.
The index could test 98.00 if EUR/USD continues its run toward 1.12.
Higher rates prospects pressured European equities, as borrowing costs rise and discount rates increase, hitting growth-sensitive sectors.
The index dipped 0.5% as higher yields hit tech and real estate shares.
Unlikely, as European stocks remain supported by global demand; a sustained yield spike would be needed.
Euro-zone annual inflation climbed to 3.2% in May, breaching 3% for the first time since 2023. The acceleration, driven by rising energy and services costs, pressures the European Central Bank to reconsider the pace of rate cuts. Traders trimmed expectations for immediate easing, lifting the euro and weighing on government bonds.
A recovery in energy prices and sustained services inflation pushed the headline rate to 3.2%, its highest since 2023.
It reduces the likelihood of immediate rate cuts, with markets now expecting the ECB to hold rates until at least the September meeting.
The stronger inflation reading lifted EUR/USD, as higher for longer rates make the euro more attractive relative to the dollar.