Investors hold their breath for inflation data

The time for waiting is almost over as inflation reports from Europe and the US headline Friday's agenda, with any kind of surprise likely to sway markets as investors weigh the shifting expectations over global rates.

First up will be the euro zone inflation reading, which is expected to come in at 2.5% for May after staying stable in the last couple of months at 2.4%, while core inflation is expected to be steady at 2.7%, according to a Reuters poll.

Investors will be parsing through the data to gauge the trajectory the European Central Bank is likely to take on rates. While a rate cut in June is all but certain, the focus is squarely on what comes after that.

And so, investors are likely to be extremely sensitive to even a small beat or a miss.

Markets are pricing in 60 bps of cuts from the ECB this year but a lot will depend on the inflation and wage growth readings over the coming months.

Futures indicate European bourses are set for a lacklustre opening, with the pan-European STOXX 600 index touching a more than three-week low on Thursday but on course for a 2% gain in the month.

A downward revision to U.S. GDP on Thursday stoked expectations that the Federal Reserve has room to cut rates this year, although investors for a change took the bad news (of weaker growth) as bad news, taking U.S. stocks, the dollar and Treasury yields lower.

Markets are pricing in 35 bps of cuts from the Fed this year, with a 50% chance of a rate cut in September.

(Editing by Muralikumar Anantharaman)