Euro Zone Inflation Rises in March
The year-on -year headline measure of EU inflation posted a massive decline, coming in at 6.9% vs a forecast of 7.1%, but the real kicker reveals a drop from last month’s (YoY) reading of 8.5%. Despite the rapid YoY decline, March CPI actually rose 0.9% from February, vindicating ECB hawks and their views that markets have been underappreciating the degree to which interest rates can climb.
However, everyone remains focused on core CPI as it is a better measure of how wide-spread inflation has proven to be. As such, the reading strips out more volatile items such as fuel, energy, alcohol, and tobacco. Core inflation reached a new high of 5.7% in March and it is this measure that carries the most weight from a monetary policy perspective.
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Immediate Market Reaction
EUR/USD dipped slightly after the data release but has somewhat recovered to levels prevailing in the moments before.
Fundamental Factors Align, Highlighting EUR/USD Upside Potential
General risk sentiment has turned positive this week, as more news of enhanced regulations on smaller US banks makes the rounds. This comes after a string of supportive actions form major central banks and the Fed in particular to shore up confidence in the global banking system. A greater propensity to chase higher returns, given these new safeguards has convinced investors to drift away from safe-havens like the dollar, in search of more attractive alternatives.
EUR/USD has been a beneficiary of this shift as diverging interest rate expectations have helped the pair trade higher. In the absence of further news of distressed US banks, the pair could be eying 1.10 but risks to the downside can not be ruled out.
EUR/USD Daily Chart