06:15 AM EDT, 06/04/2025 (MT Newswires) -- The releases of the latest inflation data both from the eurozone and Switzerland both surprised to the downside on Tuesday providing encouragement to market participants looking for further policy easing from the European Central Bank and the Swiss central bank (SNB), sai MUFG.

Headline and core inflation in the eurozone slowed to 1.9% year over year and 2.3% year over year, respectively in May. The main surprise was the scale of the slowdown in services inflation to 3.2% down from 4.0%, while goods inflation remained stable at 0.6%, wrote the bank in a note to clients.

A drop in volatile tourism-related prices helped to partly explain the slowdown in services inflation, stated MUFG. Still, the report should give the ECB more confidence that inflation will remain close to its target going forward, alongside recent evidence of slowing wage growth in the eurozone.

The bank expects the ECB to deliver another 25bps rate cut on Thursday. While the ECB is likely to skip hiking rates in July, the softer inflation data gives MUFG more confidence that the policy rate will be lowered to 1.50% by year-end.

The negative impact on the euro (EUR) from the weaker eurozone inflation data has been muted at a time when yield spreads have become a less important driver of foreign exchange markets, pointed out the bank. The euro has derived support from reports that the German government is planning additional fiscal stimulus alongside stepping up defense and public infrastructure spending.

It has been reported that there are plans to pass a package of corporate tax breaks totaling 46 billion euros to spur investment. It could help Germany's economy to offset the negative impact of trade disruption, noted the bank.

Slowing inflation was even more evident in Switzerland where the headline rate fell into negative territory at -0.1% in May. Energy prices and rents were the main drivers. It was the first negative reading since March 2021 before the global inflation shock took hold from COVID-19 and the Russia-Ukraine conflict.

SNB Governing Board member Petra Tschudin attempted to downplay the importance of the negative print saying "this is just one data point" and that they are "focused on the medium-term."

As a result, MUFG still estimates the SNB to stick to its plan to cut the policy rate by a further 25bps to 0.00% when it meets on June 19. Market participants are already anticipating that the SNB may even have to return to a negative rate policy at the following meeting in September if inflation continues to surprise to the downside and the Swiss franc (CHF) remains strong.

The other alternative would be for the SNB to intervene in the foreign exchange market to weaken the Swiss franc, but could now face stronger pushback from the Trump Administration, according to the bank.