Inflation in the eurozone was stable at 2.4% year on year in April, according Eurostat's flash estimate, in line with economists' expectations. But core inflation, which shows prices without energy and food costs, fell to 2.7% year on year from 2.9% in March, supporting the case for an interest rate cut in June at the next European Central Bank (ECB) meeting.

“After the positive surprise in March that inflation fell by 0.2%, a flat reading for April is a decent result,” says Michael Field, European market strategist at Morningstar. 

“Important also was today’s core inflation reading. The continued fall in core inflation is another positive sign. Hawks had previously been concerned that services inflation could pick up again in Europe, driven by tight labour markets, but the data is thankfully saying otherwise.” 

In April, the greatest contributors to eurozone inflation were services (3.7% compared with 4% in March), followed by food, alcohol and tobacco (+2.8% year on year, up from previous month), non-energy industrial goods (+0.9%) and energy (-0.6%), according to Eurostat estimates. 

Europe's Economy is Growing Too

Eurozone inflation came along with GDP data, which showed 0.4% growth in the first three months of the year. This data confirmed the divergence of the European economy from the US, where concerns of a resurgence in inflation and an overheating economy will weigh on Federal Reserve decision on interest rates tomorrow.

“European GDP growth today surprised on the upside, delivering 0.4% growth in the first quarter of 2024, compared to the same quarter of last year (+0.3% compared to previous quarter), but the ECB’s expectations for full year growth remain a benign 0.6%,” says Field.

“Recent polls have economists overwhelmingly predicting June for the first interest rate cut, and today’s data is very unlikely to change that.”

Will the ECB Cut Rates on June 6?

The European Central Bank (ECB) monetary policy meeting will take place on June 6, and not only economists, but also some ECB officials anticipate a first interest rate cut then.

In a recent interview with Le Monde, the ECB vice-president Luis de Guindos said that “the battle isn't over, but we have notched up several important victories along the road to disinflation,” adding that the “June interest rate cut is a fait accompli".

“Despite European economies having generally avoided a more sizeable recession at the end of last year, we continue to expect weak recoveries in the near-term,” said Nomura in a recent report, where they expect the first rate cuts in June. “With monetary policy now constraining growth, the next move in rates seems likely to be down for the ECB.”

How the Dollar and Euro Could React

Today’s eurozone data seems to confirm a divergence in monetary policy between Europe and US. Tomorrow, the Federal Reserve (Fed) will decide on interest rates against a very different scenario than a few months ago. Markets are now expecting the Fed to hold rates for longer.

“Amid new data showing that inflation remains stubborn, financial markets are rapidly paring back their expectations for interest rate cuts this year,” says Sarah Hansen, market reporter at Morningstar.

With investors bracing for the possibility that the first US interest rate cut will come in the autumn, or later, the dollar is expected to strengthen against the euro. A strong dollar is positive for investors exposed to the US market, even if it makes it more expensive to buy USD financial instruments.

“The recent strength of the US dollar reflects the current market sentiment toward the Fed,” says Giacomo Calef, country head Italia di NS Partners.

“Traders' expectations, which were predicting 6/7 rate cuts at the end of 2023, have been sharply downgraded and now discount, for 2024, from a minimum of one cut to as many as two. All of this leaves an open question on the next moves by central banks, with the ECB possibly pre-empting the Fed in the long-awaited monetary pivot.”