French Inflation Softened But Core Inflation Accelerated in March

It was a relatively quiet start to the day on the economic calendar. Finalized French inflation figures for March drew interest this morning.

The markets are currently pricing in a 50-basis point ECB interest rate hike in May. However, softer inflation numbers could support a 25-basis point interest rate hike, narrowing the current monetary policy divergence currently in favor of the ECB.

In March, the French annual inflation rate softened from 6.3% to 5.7%, up from a prelim 5.6%.

According to insee.fr,

• A slowdown in energy prices (+4.9% after +14.1%) was a drag on the headline figure.
• Prices for services also saw a modest decline from +3.0% in February to +2.9% in March,
• Year-over-year, prices for manufactured goods accelerated from 2.3% to 2.9%.
• Food prices were up by 15.9% versus 14.8% in February.
• Core inflation accelerated from 6.1% to 6.2%.

This morning, ECB Executive Board Member Pierre Wunsch had this to say,

“I think May will be about 25 or 50 basis points. If there’s another upside surprise in core inflation and the lending survey doesn’t look too bad, we might have to do 50. If there is a positive surprise in core, then perhaps 25 is more appropriate.”

Wunsch added,

“Given that wage dynamics will be incompatible with the 2% inflation target for years and real rates are still low, I don’t see any quick reversal of policy once we reach the terminal rate.”

Last Wednesday, ECB Chief Economist discussed inflation, reportedly saying,

“I look at food, where inflation pressure is probably its most intense. And it’s still rising now. I don’t think we are yet at the peak of food inflation, it’s not yet there, but again it’s projected to fall this year.”

According to prelim euro area figures, food, alcohol, & tobacco saw the highest annual rate at 15.4% versus 15.0% in February.

EUR/USD Reaction to the French CPI Report

Ahead of today’s French inflation numbers, the EUR/USD fell to an early low of $1.10462 before rising to a high of $1.10760.

However, in response to the finalized inflation figures, the EUR/USD rose to a post-stat high of $1.10704 before falling to a low of $1.10643.

This morning, the EUR/USD was up 0.16% to $1.10648.

Next Up

Finalized Spanish inflation figures will also draw interest as investors consider the ECB’s next monetary policy move.

Beyond the European economic calendar, investors should continue to monitor IMF/World Bank Spring Meeting chatter. ECB President Christine Lagarde will participate.

However, US economic indicators and US bank earnings will likely have more impact on market risk sentiment.

Looking ahead to the US session, it is another busy day on the US economic calendar.

US retail sales, industrial production, and Michigan Consumer Sentiment figures will move the dial. With investors mindful of the mild recession warning, a slump in consumer sentiment and weaker-than-expected retail sales figures could further pressure the US dollar.

Investors should also monitor Fed chatter on monetary policy and the US economy. FOMC member Waller will speak today.

On the earnings calendar, Blackrock (BLK), Citi (C), JPMorgan (JPM), and Wells Fargo (WFC) deliver earnings results ahead of the US opening bell. Beyond the earnings results, references to the banking crisis will likely be focal points.