Euro Area Inflation Softens Enough for the ECB to Hit Pause

It was a busy morning on the European economic calendar. The French and German economies were in the spotlight ahead of prelim euro area inflation numbers for March.

Economic indicators from Germany were disappointing, with retail sales unexpectedly falling by 1.3% versus a forecasted 0.5% increase. In January, retail sales rose by 0.1%. A higher-than-expected rise in unemployment pushed the German unemployment rate from 5.5% to 5.6%. Economists forecasted the unemployment rate to hold steady at 5.5%.

Following softer German inflation numbers from Thursday, inflationary pressures also subsided in France. The French annual inflation rate eased from 6.3% to 5.6% versus a forecasted 5.5%.

The markets expected a similar trend for the euro area, with Spanish, German, and French inflation figures coming in considerably softer.

According to prelim figures, the euro area annual inflation rate softened from 8.5% to 6.9% versus a forecasted 7.1%.

According to Eurostat,

• Food, alcohol, & tobacco had the highest annual rate (15.4% v 15.0% in Feb).
• Non-energy industrial goods (6.6% v 6.8% in Feb) and services (5.0% v 4.8% in Feb) also contributed.
• However, the annual inflation rate for energy tumbled from 13.7% to -0.9%.
• The core annual inflation rate for the euro area accelerated from 5.6% to 5.7%.

While inflation remains elevated across the euro area, today’s stats should allow the ECB to join other central banks in hitting the pause button that would leave interest rate differentials in favor of the dollar.

EUR/USD Reaction to Euro Area Inflation

Ahead of the euro area inflation figures, the  EUR/USD rose to a pre-stat high of $1.09258 before sliding to a low of $1.08730, with economic indicators from German doing the damage.

In response to the euro area inflation numbers, the EUR/USD fell from $1.08897 to $1.08754 before steadying.

This morning, the EUR/USD was down 0.23% to $1.08813.

Next Up

With inflation in focus, investors should also consider ECB member speeches. ECB President Christine Lagarde will speak today. Comments relating to inflation and ECB monetary policy will draw interest.

Looking ahead to the US session, it is a busier day on the US economic calendar. Core PCE Price Index, consumer sentiment, and personal spending/income figures will draw plenty of interest.

Barring an unexpected slide in personal spending, the Core PCE Price Index should influence the EUR/USD pair. Economists forecast the Core PCE Price Index to rise by 4.7% year-over-year in February. Hotter-than-expected inflation numbers would test the market expectation of a Fed interest rate pause in February.

Investors should also monitor Fed chatter on monetary policy and the US economy.