Euro set for best monthly gain in a year ahead of inflation data

The euro drifted lower on Tuesday, but was still set for its best month in a year ahead of red-hot inflation data that will boost expectations of interest rate increases from the European Central Bank (ECB).

German consumer prices jumped a whopping 8.7% and Spanish inflation rates resumed their upward march, setting the stage for more record eurozone aggregate inflation data for May, with a Reuters poll expecting a print of 7.7%.

With the European Union closing ranks to cut 90% of Russian oil imports by the end of this year, the inflation demon is unlikely to be tamed anytime soon, even though markets expect an aggressive 115 bps of rate hikes in the last six months of 2022.

“The risk is significantly to the upside for the eurozone aggregate data,” said Adam Cole, chief currency strategist at RBC Capital Markets. “A substantial upward revision to the ECB’s near-term inflation trajectory is likely when the ECB’s next round of staff forecasts are published in June.”

The euro was at $1.0737, down 0.4%, having hit a five-week high of $1.0786 overnight. The single currency is set for a 2.2% gain in May, which would be its biggest monthly rise in a year.

The euro’s overnight gains propped up the dollar, which also benefited from a surge in U.S. Treasury yields.

The dollar index was at 101.71, having fallen to a five-week low of 101.29 overnight.

News that European Union leaders agreed in principle on Monday to cut most oil imports from Russia by the end of this year sent oil prices higher and boosted commodity currencies.

The Canadian dollar touched 1.2653 per dollar, near a one-month high struck overnight, ahead of Wednesday’s Bank of Canada meeting at which all 30 economists polled by Reuters expect a 50-basis-point rate hike to 1.50%.

Bitcoin was on the front foot at around $31,600 having risen above $32,000 overnight for the first time in more than three weeks.