Eurozone inflation data weakened, but Christine Lagarde argues that the figures are still too high.

Economic news from the Eurozone dominated the market headlines on Thursday (1st June). The release of Eurozone inflation data and that of some member countries showed a faster-than-expected slowdown. However, the hawkish statement from ECB President Christine Lagarde lifted the EUR/USD by around 0.6% to around 1.0750.

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Preliminary data from Eurostat indicate that the inflation rate in the Eurozone only grew by 0.2% for core goods and remained flat at 0.0% for all goods in May 2023. The annual inflation rate also dropped from 5.6% to 5.3% for core goods and 7.0% to 6.1% for all goods. These figures are significantly weaker than consensus estimates and the previous period's data.

These are the most notable signs of disinflation in the Eurozone in recent months. However, Christine Lagarde emphasized that the inflation rate is still too high and that the central bank needs to tighten its policy further.

"Today, inflation remains too high and will stay high for too long," said Lagarde. "We have made it clear that we still have much to do to bring interest rates back to a sufficiently restrictive level."

Current market data indicate an 85% probability of a 25 basis point interest hike in the upcoming ECB meeting on June 15th. There is also a possibility of announcing an additional 25 basis point rate hike in July to curb inflationary pressures. In line with these expectations, the euro has strengthened.

"The euro is taking a bit of a ride higher," said John Velis, FX and macro strategist at BNY Mellon. "There's a sort of narrowing interest rate differential ... when the ECB is expected to hike one or two more times and the Fed is more questionable about that."

The euro's appreciation coincides with the weakening of the US dollar, resulting from decreased speculation regarding a "Fed rate hike" in the past 24 hours. Two officials from the Federal Reserve expressed the need to evaluate more data before raising interest rates again. One is a candidate for Vice Chair of the Federal Reserve, favored by Jerome Powell.