ECB Economic Bulletin Shouts Inflation Too High for Too Long

It was a busy day morning on the European economic calendar. Inflation figures from Spain and the euro area Business and Consumer Survey were in focus.

Softer inflation numbers from Spain and a moderately weaker Business and Consumer Survey supported the bets of an ECB pause on interest rate hikes in April.

Spain’s annual inflation rate slowed dramatically from 6.0% to 3.3%, with consumer prices rising by 0.4% in March versus 0.9% in February.

For the Euro area, the Business and Consumer Survey slipped from 99.6 to 99.3. Significantly, consumer inflation expectations rose from 17.7% to 18.9%.

While the numbers drew interest, the ECB Economic Bulletin was the area of focus this morning. With the ECB switching to data-dependent monetary policy decisions, the Bulletin provided investors with some of the ECB’s focal points and considerations.

Salient points from the ECB Economic Bulletin included,

• Headline inflation is expected to fall significantly during 2023, with falling energy prices and easing pipeline pressures a drag on inflation.
• ECB staff project inflation to soften from 10.0% in Q4 2022 to 2.8% in Q4 2023.
• While inflationary pressures are subsiding, the pace of wage growth remains elevated.
• ECB staff expect growth to slow to 1.0% in 2023 before expanding by 1.6% in 2024 and 2025. Staff revised growth upward by 0.5 percentage points for 2023 while downwardly revising growth by 0.3 percentage points for 2024.

However, the headline from the Economic Bulletin painted a different inflation picture. “Inflation is projected to remain too high for too long!”

EUR/USD Reaction to the ECB Economic Bulletin

Ahead of the euro area Business and Consumer Survey and the ECB Economic Bulletin, the EUR/USD fell to a pre-stat session low of $1.08236 before rising to a high of $1.08794.

In response to the survey numbers and the Economic Bulletin, the EUR/USD rose to a post-stat high of $1.08764 before falling to a low of $1.08620.

This morning, the EUR/USD was up 0.17% to $1.08634.

Next Up

Prelim German inflation numbers will be in focus ahead of the US opening bell. Economists forecast the German annual inflation rate to soften from 8.7% to 7.3%. Cooler-than-expected numbers would further support the ECB to hit the pause button on interest rate hikes. In March, the ECB announced a shift in policy moves to a data-dependent approach.

With inflation in focus, investors should also consider ECB member speeches. Updates from a General Council Meeting could draw interest.

Looking ahead to the US session, it is a busier day on the US economic calendar. US initial jobless claims and Q4 GDP numbers will be in focus.

Barring a material revision to the Q4 GDP numbers, the initial jobless claims should influence the EUR/USD pair. Economists forecast initial jobless claims to increase from 191k to 196k. However, sub-200k would continue to reflect very tight labor market conditions.

Investors should also monitor Fed chatter on monetary policy and the US economy.