The end of the week could be pivotal for the Euro, as data releases build up for the announcement of flash March CPI from the shared economy. At the same time, EuroStat will announce the latest unemployment figures.
The ECB’s rate hike at the last meeting was seen as a way to communicate financial stability to the market. The move was meant to imply that the ECB was not worried about potential contagion in the banking sector and was continuing to focus on monetary policy. But after the meeting, President Lagarde made it abundantly clear that the next rate decision was up in the air.
It’s all down to the data
Before the last ECB meeting, inflation in the shared economy had hit another record high, practically forcing the bank’s hand. Now that it seems that the banking situation is starting to calm down, markets can start focusing on macroeconomic data again. It’s expected that the drop in industrial activity through the winter, with general concerns about the economy, would help reduce demand pressure during March. And that might help bring inflation off of another record high.
But, that was the expectation the last time, when inflation surprised to the upside. With the ECB now seen as very dependent on the data, a surprise to the upside could significantly shake up rate expectations for the Euro. Many analysts are thinking that the ECB would want to pause at the next meeting to help banks adjust to the higher rates. But that view might fade over the coming weeks if there are no crises at banks. Persistently high inflation, as labor unions are ramping up pressure to raise wages, could also shift the rate outlook. Meaning a fading of the initial reaction to the data is likely.
What to look out for
Germany is expected to report CPI figures on Thursday. As the largest economy, it’s expected to set the tone for what the ECB will publish the next day. Also, it was Germany who pushed prices higher last time around, so markets are likely to be extra focused on the data this time around.
German Flash March CPI change is expected to accelerate slightly on a month-by-month basis to 0.9% compared to 0.8% prior. But that’s not expected to be enough to push the annual rate all that much. Annualized Flash March CPI is expected at 7.5% compared to 8.7% recorded in February.
Driving the Euro
French Flash March CPI comes out before the open, and is also expected to show declines. Annual French inflation is expected to drop to 5.5% compared to 6.3% reported prior. Usually the combination of German and French inflation gives a pretty good view of what to expect from the Eurozone, so unless there is a major difference when the data is released, the market direction should be clear at this point.
For the Eurozone, focus is likely on the core rate as that typically is the interest of the central bank. Although, recently members of the ECB have noted “too much” concern on core rates. Headline inflation is expected to come down to 7.4% compared to 8.5% prior. But core CPI is expected to tick up to 5.7% compared to 5.6% prior, and would be another record high.