After Europe narrowly avoided falling into a technical recession at the end of last year, apparently traders are starting to think that the ECB will hold on to higher rates. If the economy manages to eke out even a little bit of growth, then the shared central bank has less pressure to support the economy. Then it can address the still high inflation rate.
Of course that can all change if there is an unexpected move in the data. That can come this week in the form of a sudden drop in the inflation rate. Or if PMI figures are revised lower on Friday. But the EuroZone Inflation data, particularly the CPI figures, are likely to have the most impact on rate cut expectations and Euro pairs
What the Forecast Say
The market has been cutting back on its easing expectations for the ECB, and now is pricing in less than 100bps. That would be fewer than four rate cuts, at the normal 25bps clip. It seems that the market is agreeing with the hawkish ECB member Robert Holzmann, though for different reasons. The Austrian representative on the Governing Council says that the ECB won’t cut rates until after the Fed does.
But that’s in line with the Fed’s projections of not cutting rates until near the end of the year. The market, on the other hand, believes the first rate cut in the US will be in June, with the ECB likely to be soon after. Officials believe that the economy will remain resilient enough to allow central banks to keep rates higher. The market is banking on a downturn in the economy that will force rate cuts. For that reason, indicators around GDP might actually be more important than inflation in trying to figure out what will happen with rates, and therefore exchange rates.
Getting a Head Start on Volatility
As usual, the components of EuroZone inflation come out ahead of the number including all member states. First to report on Thursday is France, which is expected to see inflation continue to remain elevated if declining to 2.9% from 3.1% prior. After France PMIs outperformed, there could be some additional expectations around this figure as faster economic growth typically leads to higher prices.
Next up is the procession of German states each reporting their respective CPI figures. Typically the market tries to anticipate the final figure by observing a trend in the German data. That often happens by the time North Rhein Westfalia, the largest state, reports. The consensus is that German inflation will continue its slow decline to 2.7% from 2.9% prior.
The Market-Moving Numbers
Before the Euro Zone releases its CPI figures, the final PMI for the area is published. If it comes in line with expectations, it likely won’t change the market outlook, reducing volatility. But a revision lower could get the market worrying that the economy hasn’t actually started to turn around as initially thought. That could end up weakening the Euro, if traders start pricing in more rate cuts.
EuroZone inflation is expected to come down to 2.5% compared to 2.8% prior, still above target, but getting close. The core rate, on the other hand, is expected to show more “stickiness” and come down to just 2.8% from 3.3% prior. At the same time, Euro Area unemployment is expected to be reported as increasing to 6.5% from 6.4% prior.
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