The EUR and Dollar in the Spotlight – Inflation the Driver

The economic calendar is on the heavier side through the day and the markets will certainly be keeping a close eye on inflation figures out of the Eurozone and the U.S. The markets continue to look for economic indicators that can, not only force the hand of the ECB to begin considering a first move towards monetary policy normalization with a rate hike over the near-term, but also lead the more hawkish FOMC voting members to begin supporting 3 rate hikes for the remainder of the year.

German and Spanish inflation figures released on Thursday were somewhat disappointing and contributed to the EUR’s demise through the day, so we are likely to see the annual rate of inflation fall back below the ECB’s 2% target, supporting Draghi’s view on rates and easing back market expectations of a move by the ECB any time soon.

The weaker figures come at an opportune time, with the ECB certainly wanting to monitor the elections in France and to a lesser extent, any near-term Brexit effects to the Eurozone economy.

The EUR has found strong support from the surge in inflation and upbeat sentiment towards the economic outlook, so assuming this afternoon’s figures are on the weaker side, we would expect the EUR to ease back through the morning session ahead of this afternoon’s stats out of the U.S, a bounce ahead of the European open coming off the back of solid retail sales figures out of Germany. Retail sales surged by 2.1% in February, following 3 consecutive months of decline, according to this morning’s figures. Macroeconomic data out of France was mixed this morning. French retail sales fell more than expected, weighing on the EUR, the French elections likely to be influencing consumer spending habits, while inflation saw bounced in March, offsetting the negative response to consumer spending figures, with German unemployment numbers to come ahead of the Eurozone’s inflation figures.

For the Dollar, FOMC member commentary has continued to be mixed through the week, with a lack of particularly hawkish commentary pegging back the Dollar. Inflation remains the key for the hawks and February Core PCE Price Index figures scheduled for release this afternoon will certainly have an influence on the Dollar, any uptick towards the FED’s 2% target expected to shift sentiment towards FED monetary policy.

While the inflation figures are the key stats out of the U.S for the day, the markets will need to keep an eye on February’s personal spending figures, the continued rise in consumer confidence needing to lead to consumers loosening the purse strings in support of the economy.

The Dollar Spot Index has enjoyed a good start to the day off the back of the better than expected 3^rd estimate, 4^th quarter GDP figures released on Thursday, the Index hitting an intraday high of 100.6 through the Asian session.

Looking across the pond, cable is sitting in the red following Thursday’s gains, the pound giving up early gains ahead of today’s stats, which include 3^rd estimate 4^th quarter GDP and business investment figures. Forecasts are for 3^rd estimate figures to remain unchanged, which likely be a positive for the pound, economic growth picking up from the 3^rd quarter, while the weaker than expected house price figures released ahead of the European session brought the pound back down to earth.

There’s certainly plenty for the markets to consider in positioning for the months ahead, with the U.S administration and the FED the key drivers for the Dollar, Brexit and the BoE factors to consider for the pound, with French elections and Draghi’s desire to hold monetary policy unchanged influencing the EUR, a Le Pen victory the worst case scenario for the EUR. Interestingly, the geo-political risk is a negative for the respective currencies, though hopes are that Trump will break out and deliver.

At the time of the report, the Dollar Spot Index stands at 100.52, a gain of 0.11%, with the index likely to stay within the day’s tight range ahead of today’s inflation figures, with the EUR up 0.12% at $1.06868 and cable down 0.08% at $1.24582.

It’s all down to the stats today and the Dollar could see a major rally should the core PCE price index figures come in ahead of foracast…