Euro stands firm ahead of inflation gauge, Lagarde speech.

The euro held onto its recent gains on Tuesday ahead of European inflation figures this week that are expected to run hot and a speech from central bank chief Christine Lagarde, while a rally in oil prices boosted commodity currencies. The euro rose 0.28% overnight and at one point poked above its 50-day moving average. It last sat at $1.0574.

German inflation figures are due on Wednesday, French data on Thursday and euro zone numbers on Friday. European Central Bank President Lagarde is also due to speak at the ECB forum in Sintra, Portugal, at 8:00am on Tuesday. Hike expectations have the euro trading firmly against the yen whilst it also has momentum on sterling and has gained 1.2% this month to 1.16.

From a euro viewpoint, the fact that the ECB is set to deliver significant rate hikes over the second half of 2022 should prove supportive of the currency, as should the ending of QE and the negative interest rate regime that has been in place since 2014. The key support level of $1.04 may continue to hold for the euro.

sterling faces a number of headwinds. The UK economy has lost considerable momentum since earlier in the year in the face of a tightening of fiscal and monetary policy as well as galloping inflation. GDP is set to contract in the second quarter. The Bank of England is quite downbeat on the UK economy’s growth prospects as a result of a squeeze on real disposable income from higher taxes and elevated inflation, forecasting stagflation out to 2024. Brexit has also acted to depress trade with the EU, and the UK is facing a widening of its balance of payments deficit this year. Thus, there are clear downside risks for sterling which could come more to the fore if a weakening of the economy results in market rate hike expectations not being delivered on by the BoE.

Inflation data will also feature in the US this week. Core-PCE inflation has eased slightly over the past few months, albeit from very elevated levels, printing at 4.9% in April. Furthermore, headline-PCE was at 6.3%. The core-rate is expected to edge lower again in May, falling to 4.7%. Despite very high inflation levels, US consumption has been surprisingly strong in recent months, particularly goods consumption. However, consumption has risen at a faster pace than incomes every month so far this year, indicating that this trend may not be sustainable. Indeed, personal spending is forecast to grow more slowly in May, rising by 0.5% from 0.9% in April.

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