JUNE 13 Euro-zone CPI (MoM) (MAY) (9:00 GMT; 5:00 EDT)
Expected: 0.6%
Previous: 0.3%

Euro-zone CPI (YoY) (MAY) (9:00 GMT; 5:00 EDT)
Expected: 3.6%
Previous: 3.3%

What Are The Markets Facing?

European Central Bank President Jean-Claude Trichet has long been one of the most hawkish central bankers in the G8, and Monday’s release of Euro-zone inflation data may reiterate why. Euro-zone CPI is forecasted to jump 0.6 percent in May while the annual rate is anticipated to jump to 3.6 percent, matching a 16-year high. There is little doubt that price pressures are picking up globally, but this carries more serious repercussions for the European markets as Mr. Trichet said last week that some council members actually wanted to raise rates during their June meeting. Indeed, during the Q&A session, Mr. Trichet went so far as to say that there is some potential that the central bank will raise rates next month. Meanwhile, he said in a speech that "risks to price stability have increased further" and that the ECB is in a state of "heightened alertness," which is a new phrase that we haven't seen in his commentary. Furthermore, despite recent declines in various measures of Euro-zone services and manufacturing sector growth, Mr. Trichet called the economic fundamentals "sound." In fact, the ECB is a bit more optimistic on economic prospects for the region, as 2008 growth forecasts were revised up to 1.5% - 2.1%, from 1.3 percent - 2.1 percent. Overall, it is clear that the ECB has absolutely no intention of cutting rates this year, and in fact, there is greater potential that because the bank's primary mandate is to focus on price stability, they may actually hike by 25bps next month to 4.25 percent.

Bonds – 10-Year German Bund Futures

Bunds have fallen significantly in recent months toward one-year lows of 109.75, as the ECB remains staunchly hawkish. Upcoming Euro-zone CPI data could determine the next move for the contract, as hot inflation numbers will only raise speculation the bank will raise rates in July and thus, could lead Bunds to make a major test of 109.66/75. On the other hand, surprisingly soft numbers could send the contract surging from these ultra-low levels toward 110.27.

FX – EUR/USD

EUR/USD continues to consolidate within a wide range of 1.5350 – 1.5800, as the recent surge in the US dollar has led the pair to pull back sharply thanks to heavy verbal intervention by Federal Reserve and government officials and an unexpectedly strong rise in US consumer prices. Looking ahead to Monday, the release of Euro-zone CPI provides ample event risk for the EUR/USD pair, as the data is anticipated to show a rise in prices on a monthly basis, while the annual measure will likely be confirmed at initial estimates of 3.6 percent. Given the jump in energy and food prices during the month of May, there are upside risks for the headline CPI numbers and if the indexes are stronger-than-forecasted, EUR/USD could surge from support toward 1.55. On the other hand, softer-than-expected figures could send EUR/USD tumbling toward 1.5300.

Equities – Xetra DAX Index

The Xetra DAX index has managed to hold above support at 6,650, but resistance looms at the 100 SMA at 6,810. Given the sharp declines seen in over the past few weeks, the DAX could simply consolidate within this range on Monday. Traders should keep an eye on financial market news, as indications of distress amongst financial institutions could trigger widespread sell-offs in the global equity markets (and for that matter, forex carry trades). Furthermore, Monday’s release of Euro-zone CPI could weigh on stocks, as the data is likely to reflect rising inflation pressures and support ECB President Trichet’s hawkish bias, suggesting the bank could raise rates as soon as July.

Terri Belkas is a Currency Strategist at FXCM.