Key Moments:

• France’s harmonized inflation rate dropped to 0.6% year-over-year in May.
• Weaker French inflation figures intensified market expectations of further interest cuts being imposed by the ECB in 2025.
• The EUR/USD fell to 1.1349.

French Inflation Falls Below Expectations

Preliminary figures from France’s National Institute of Statistics and Economic Studies (INSEE) released Tuesday showed that the country’s harmonized consumer price index rose just 0.6% in May compared to the same month last year. This represented a notable drop from April’s 0.9% annual increase and marked the lowest inflation rate since December 2020. We should also note that even when referencing France’s national inflation index, the YoY rise in prices was 0.1% lower than last month and hit 0.7% in May.

The weaker-than-anticipated numbers, driven by falling energy costs and slower service price growth, undercut the expectations of analysts polled by Reuters, who had forecast an average inflation rate of 0.9%.

Breakdown by Sector

The data showed that energy prices dropped further from the plunge seen in April, falling 8.1%. The decrease was largely attributed to continued declines in gas prices and marks the fourth consecutive month of falling energy costs.

Meanwhile, inflation in the services sector slowed to 2.1% in May, easing from April’s 2.4%. Reduced transport price growth and a sharper decline in communication prices were cited as key factors behind the deceleration by the INSEE.

In contrast, food prices ticked up slightly from April’s 1.2% and hit a growth rate of 1.3%. Manufactured goods inflation stayed at a negative 0.2%. Prices in the tobacco industry, meanwhile, rose 4.1%.

Euro Loses Ground, ECB Projected to Slash Key Interest Rates

The euro came under pressure following the inflation data’s disclosure, as investors began pricing in a wider divergence between European Central Bank (ECB) and Federal Reserve policy directions. While the Fed faces upside inflation risks, highlighted by strong US Flash PMIs, the ECB may now be compelled to consider deeper or earlier rate cuts in light of subdued inflation trends in the Eurozone’s second-largest economy. These forecasts pushed the EUR/USD lower, and the pair fell by around 0.3% to 1.1349 on Tuesday.