As the EURUSD continues to slip lower, Euro bulls are looking for something that could reverse the course. The next major data is inflation, which has come under increased scrutiny as the ECB could be heading for an extended pause in rates. On the other hand, ECB President Christine Lagarde made an interesting comment last week that implies further weakness in the shared currency.
Bracketing the weekend is a series of preliminary inflation readings for the month of March. France is first on Friday, and the market could react as the second largest economy in the bloc might provide directionality for the EuroZone figures which come out on Tuesday. But before that, on Monday Germany reports its flash CPI figures as well. Unless the data all aligns with expectations, this could provide a bit of volatility for the Euro.
Higher Prices… Lower Euro?
The consensus among economists is that tariffs have the effect of raising consumer prices, as at least some of the cost is passed on to consumers. That would induce the central bank to take on a more hawkish stance, which usually means the currency would get stronger. But Europe is in a bit of a unique situation.
That led to a peculiar comment from Lagarde, suggesting that the Euro will get weaker if tariffs are imposed. And that weaker Euro would translate to more inflation across the block as it absorbs the cost of imports. Europe is particularly reliant on energy imports, and a weaker Euro means those costs would be higher.
So, Has There Been a Peak?
The Euro was cruising higher on higher yields in European debt as investors priced in increased borrowing to match the bloc’s ambitions to increase defense spending. But that move has now been largely priced in. Now it’s a matter of when the funds actually start getting spent. Until that happens, the fundamentals of the economy remain in play, and that showed slow growth for the economy this year.
Tariffs and higher inflation would also weigh on economic growth, potentially dragging down the Euro. That could mean that the usual upward boost that could come from higher inflation might not manifest. The ECB might be inclined to stay dovish in the short term, at least until the government spending kicks in and presumably supports growth.
What to Look Out For
On Friday, French Flash March CPI is expected to show an annual growth rate of 1.0%, up from the 0.8% prior. France has been at the bottom end of inflation, as its service sector remains under pressure.
On Monday is German Flash March CPI, which is expected to remain unchanged at 2.3%. This could reflect a bit of consumer hesitancy around the election period, as it was unsure what would happen with the debt brake. Since then, consumer sentiment has improved, meaning markets could look past this figure.
Tuesday has the EuroZone Flash March CPI, which is forecast to increase to 2.3% from 2.1% prior. That moves away from the 2.0% ECB target. Meanwhile, the core rate is expected to stay unchanged at 2.6%.