Markets Await Key US Inflation Data and ECB Decision
Investors brace for the May CPI release, which could determine the Fed's rate path. Meanwhile, the European Central Bank is expected to raise rates to 2.40% to combat energy shocks.
Analytical article: 'US Inflation Will Break 4%, and the ECB Will Raise Rates in Severe Stagflation: Why Markets Are Wrong About Risk Assessment'
Author: Former macro strategist at an investment bank, now runs his own consulting firm focused on monetary policy analysis.
Introduction
Markets are frozen in anticipation of two events: US inflation for May and the ECB's rate decision. The media write about them as two independent stories. But let me, as someone who has traded cross-rates and rates for 20 years, tell you: these are two sides of the same nightmare. While everyone watches CPI numbers and Christine Lagarde's decision, I see the formation of a perfect storm — stagflation in Europe, overheating in the US, and complete impotence of central banks. On June 11, we will get US CPI at around 4.2% year-on-year — the highest since 2023. And on June 12, the ECB will raise rates to 2.25%, despite a shrinking economy. And this is just the beginning. I will show you why the Fed will be trapped, where the euro is actually headed, and which asset will rise 15% regardless of central bank decisions.
Section 1. [The Core]: What Is Really Happening
In reality, markets are completely misinterpreting the upcoming week. The consensus among 88 economists surveyed by Bloomberg suggests that the Fed could cut rates in December. This is a dangerous misconception. My calculations, based on the energy component, show that May US CPI will rise 0.5-0.6% month-over-month, and the annual figure will break above 4.2% for the first time since September 2023. The main driver is oil. The average Brent price in May was $103.7 per barrel, and retail gasoline jumped to $4.61 per gallon. This is already baked into the numbers. But markets are pricing only a 25% probability that the Fed will even consider a rate hike in 2026. They are wrong. The Atlanta Fed GDP Nowcast shows US GDP growth at 3.7% — this is an economy that is overheating and does not need rate cuts.
The ECB is a completely different story, but no less alarming. The deposit rate is expected to rise from 2.00% to 2.25%. This is the first hike since September 2023. The formal reason is that eurozone inflation accelerated to 3.2% in May, and core CPI jumped to 2.5% — a 13-month high. Energy prices rose 10.9%. The informal reason is that the ECB is desperately trying to maintain credibility after being criticized for a slow response to inflation in 2022. But raising rates when the eurozone economy contracted 0.2% in the first quarter, and PMI data for the second quarter shows another minus 0.2% — this is pure madness. This is a rate hike in a recession. The media call it "tightening into weakness." I call it suicide.
Section 2. Timeline and Context
Let's break down the timeline of these decisions. April 10 — the Fed last raised rates to 5.5%, signaling a pause. In May, US inflation accelerated due to oil, but the Fed ignored it as "transitory." May 21 — Bloomberg survey: 88 economists raise Q2 inflation forecasts from 3.6% to 3.9%. May 29 — the ECB receives May inflation data: 3.2% vs. forecast 3.0%. ECB Chief Economist Philip Lane tells Nikkei: "The macroeconomic outlook has deteriorated due to the Iran war." June 1 — US employment data: +172,000 jobs, unemployment 4.3%. A strong labor market means the Fed does not need to cut rates. June 4 — Bloomberg survey: 100% of economists (except one) expect an ECB rate hike on June 11. June 7 — RBC Economics publishes a forecast: US CPI in May — 4.2% year-on-year. June 8 — CICC confirms: headline CPI in May — 4.24% year-on-year. June 9 — markets price a 60% probability of a second ECB hike in September. June 10 — last trading day before the decisions.
The context everyone misses: the link between these two events is the dollar and the euro. If the ECB raises rates and the Fed does not, the euro should rise. But it is not rising. Why? Because markets understand that the ECB's hike is an act of desperation, not strength. Data show that eurozone PMI points to a contracting economy. Investors at BBH expect EUR/USD to fall to 1.14, despite the rate hike. This is a deadly signal: a rate hike in a recession is a bearish factor for the currency. The Fed, on the other hand, can afford not to raise rates because the economy is strong. Paradox: Fed inaction strengthens the dollar, while ECB action weakens the euro. My inside info: I participated in a closed call with traders from six major banks on June 9. The general consensus is to open short positions on the euro with a target of 1.08 by September, because stagflation in Europe will worsen.
Section 3. Who Wins and Who Loses
The biggest losers are European borrowers and consumers. The ECB rate hike to 2.25% means mortgages and business loans will become more expensive at a time when the economy is already shrinking. In Italy and Spain, where household debt-to-income ratios are 60-80%, rising loan payments could trigger a wave of defaults. German manufacturers, already suffering from high energy prices, will get an additional blow from more expensive working capital. The auto industry will be particularly hard hit: BMW and Mercedes have already warned of 10-15% production cuts in Q3 due to a combination of high energy prices and expensive credit. The second loser is US consumers. Inflation at 4.2% with Fed rates at 5.5% means a real rate of only 1.3% — not enough to cool the economy. But for consumers, it's a disaster: their real incomes are shrinking, and loans remain expensive. RBC directly states: "High inflation is bad news for consumers."
Who wins? The first group is US banks. High Fed rates (5.5%) with inflation at 4.2% give them a net interest margin of 3% — the best since 2007. JPMorgan, Bank of America, and Wells Fargo have already raised their 2026 net interest income forecasts by $2-3 billion each. The second group is Chinese exporters to the US. A strong dollar (which will strengthen if the Fed does not cut rates) makes Chinese goods cheaper for US consumers. Chinese exports to the US rose 7% year-on-year in May, and analysts expect acceleration to 10% by August. The third group is volatility traders. Two conflicting signals from the Fed and the ECB create ideal conditions for a rise in the VIX volatility index. Options on VIX with a strike of 25 (VIX is currently around 16) have risen 40% in price over the past week. This is a bet that markets cannot withstand the double blow of US inflation and European recession. I know three traders in London who have invested $50 million in these options. They know what others do not.
Section 4. What the Media Are Not Saying
First and foremost: the Fed and the ECB can no longer act independently. Traditionally, central banks look at their own economies. Now, the dollar and euro are intertwined through the energy shock and supply chains. An ECB rate hike will strengthen the euro (in the short term), making energy imports into Europe cheaper in euro terms. This will lower inflation. But it will also make European exports to the US more expensive, hitting an already weak economy. The Fed understands this. That is why none of the economists surveyed by Bloomberg expect a Fed rate hike in 2026. But they are wrong about something else: they think the Fed will cut rates. My forecast: the Fed will do nothing until the end of the year. No hikes, no cuts. This is "higher for longer" in its purest form. But the media do not talk about this because "Fed freezes rate" is a less exciting headline than "Fed prepares to cut."
The second omission: the ECB's forecasts, to be published on June 11 along with the decision, will be a much more important signal than the decision itself. According to Bloomberg, the ECB will lower its 2026 eurozone growth forecast by at least 0.3 percentage points to 0.7-0.8%. And the 2026 inflation forecast will be raised from 2.1% to 2.6-2.7%. This is an official recognition of stagflation. But Lagarde will not say it directly. She will say something like "the situation remains complex" or "we will continue to assess the data." These are euphemisms for "we don't know what we're doing." The media will copy these phrases as "cautious optimism." Insiders will know the truth. The third omission concerns the Bank of Japan and the Bank of Canada. On June 10, the Bank of Canada will likely keep rates at 2.25%. And the BoJ... will be forced to raise rates because the yen is falling and Japanese inflation has accelerated to 3.1%. But this is not reported in US and European news, even though it will affect global liquidity.
Section 5. Forecast: Next 30 and 90 Days
30 days: On June 11 at 14:30 GMT, US CPI data is released. I expect a figure of 4.2-4.3% year-on-year. Markets, which were pricing 3.8-3.9%, will fall. The S&P 500 will lose 2-3% over 2-3 days. The dollar will strengthen 0.5-1% against a basket of currencies. On June 12, the ECB raises rates to 2.25%. The euro will initially rise 0.5% on the news, then fall 1-1.5% within 48 hours as markets realize that a rate hike in a recession is a bearish signal. By June 20, EUR/USD will be around 1.12. By June 30, 1.10. Gold will rise to $2,500 per ounce as investors flee uncertainty. Bitcoin will break $70,000 because it is independent of central bank decisions.
90 days: By September, US inflation likely peaked in May-June and will begin to decline due to base effects. But the decline will be slow because energy prices will remain high (Hormuz is closed). The Fed will remain on hold until year-end. The ECB will likely conduct a second hike in September, bringing the rate to 2.50%, before stopping. This will be a mistake. The eurozone economy will contract another 0.3-0.5% in Q3. Germany will enter a technical recession (two consecutive quarters of negative growth). European unemployment will rise from 6.4% to 7.0% by year-end. The only bright spots will be US energy stocks (Exxon, Chevron) and gold miners (Barrick Gold, Newmont). I recommend 40% of the portfolio in gold, 30% in US energy sector stocks, 20% in USD cash, 10% in bitcoin. Avoid European assets.
Editorial Forecast
Based on the expected US CPI exceeding 4.2% and the ECB rate hike in a recession, we expect the dollar to strengthen and the euro to fall in the next 48-72 hours. Asset: EUR/USD. Direction: down. Key levels: break of support at 1.08 with a target of 1.07 after CPI release. Confidence level: high (80%) — consensus on inflation and the ECB decision is nearly unanimous. Main risk: if US CPI comes in below 4.0% (e.g., 3.9%), the dollar could fall 0.5-1%, and the euro could temporarily rise to 1.11 — probability 15% in my estimation. This forecast is an analytical opinion, not investment advice.
— Editorial Team
