Eurozone Flash March CPI and Odds of an April Hike

Markets are at odds with economists over the Eurozone's rate trajectory, as the Euro remains under pressure from higher fuel prices. But how long crude oil remains elevated could be the key unknown determining currency evolution.

The Market Moving Points

• The Eurozone CPI is expected to jump to 2.7% from 1.9% as energy prices surge across the shared economy due to higher crude and gas input costs.
• The Euro has underperformed amid fears that stagflation, driven by higher inflation and interest rates, could stifle economic growth.
• Economists still see the ECB keeping rates steady for the rest of the year, unlike markets, which are pricing in at least 50 bps of tightening.
• The chance of an April ECB rate hike is around 40% but could vary substantially depending on the upcoming inflation data.

Euro Area Inflation Already Rising

Traders will be closely monitoring Tuesday's Eurozone CPI release to see how much higher crude prices are affecting consumer prices. Economists believe there will be some delay before the full effect is felt, so a large price increase in March could mean an even higher peak in inflation, increasing the amount of tightening the ECB will have to carry out to deal with the situation. Going into the data, economists and the market do not agree on the future of monetary policy in the Eurozone. Almost two-thirds of economists polled after the war started say they expect the ECB to hold rates unchanged at 2.0% for the rest of the year. This is despite economists raising their inflation projections for the year, expecting an average rate of 2.6% rather than the 2% predicted before March. This is contrary to market expectations that see 50 bps of tightening by year-end and a 50% chance of a third hike. Futures currently see the odds of an April hike at around 40%, but that is likely to depend heavily on the March inflation data.

As is traditional, constituent countries will release their flash March PMIs ahead of the Eurozone-wide reading. On Friday, Spain reported headline inflation rose to 3.3% annually, up from 2.3% in February. The focus turns to Monday's release of German headline CPI, which is expected to jump to 2.6% from 1.9% previously. Analysts expect a slight divergence in the data, with central European countries like Germany seeing a smaller increase than peripheral ones, in part due to stricter regulation of energy prices. Uneven increases in fuel costs in Europe are likely to impact headline inflation in March and were behind some recent shortages in the Eurozone as "fuel tourists" crossed borders to take advantage of lower regulated prices. Traders will likely assess how closely German, French, and Spanish headline CPI figures match expectations, which could set the tone for the market ahead of the release of the Eurozone figure. Although Flash March Euro Area CPI is anticipated at 2.7%, well above the 1.9% reported in February, the core rate is expected to increase only to 2.6% from 2.4% a month earlier.

EURUSD Falls Amid Stagflation Fears

Markets worry that higher fuel costs will stifle Europe's tepid growth and that the ECB will have to tighten policy further by raising rates. A rate hike as soon as April is on the table, depending on how quickly inflation rose in March. At its last meeting, the ECB raised its inflation outlook for the year to 2.6% from 1.9% but still predicted it would fall back to target in 2027. This opens the question of whether the central bank will "look through" an energy supply shock. However, lower rates could also be negative for the Euro as other central banks take on a more hawkish stance. Lower-than-expected inflation could provide some relief to the markets, as stagflation fears might be a little exaggerated.

EURUSD Could Form a Double Bottom

Fibre had four consecutive sessions in the red last week, which pushed prices under the media VWAP line near 1.1536. If the decline continues, the next support can be seen at the lower VWAP at 1.1420, in breathing distance from the 1.1400 round level visited last August. On the flip side, if the pair reverses back above 1.1600, bulls might attempt to reclaim the 1.1651 VWAP resistance. With the lines flattening out, EURUSD could go sideways, but only bouncing at the bottom first would confirm a clean move upwards, as the odds of an official double bottom would turn 1.1639 into the pattern’s neckline.

Source: SpreadEx | EURUSD, Daily Chart