Eurozone PMI 51.6: Supply Shocks Tighten the ECB Dilemma

Input Prices Spike, Output Prices Follow

Input prices rose at the quickest pace in four years. Output prices were subsequently raised at the fastest rate in three-and-a-half years. These cost increases will eventually feed through to consumer prices, especially if the Strait of Hormuz situation persists. The ECB must decide whether to tighten further against this inflation or to hold because the economy is losing momentum. The June policy meeting is the next major decision point for the bank.

EUR/USD Transmission and the Policy Mix

The euro's direction depends on which side of the trade-off the ECB emphasises. A focus on inflation would signal a hawkish bias, potentially strengthening the euro via a higher rate path. A focus on the growth slowdown would weaken expectations for rate increases, putting downward pressure on EUR/USD. The supply chain disruption also supports the US dollar as a safe haven in the near term, adding a headwind for the euro. The net effect is a complex transmission that forex market analysis must weigh against US data releases.

The next scheduled data are the Eurozone services PMI and composite PMI, which will complete the May picture. The ECB's June meeting is the primary catalyst for euro direction. Until then, the PMI keeps the inflation-growth trade-off at the centre of positioning.