Can the ECB remain on hold for much longer?

A whopping 7.3% (YoY) German inflation print, coupled with an eye-watering 9.8% (YoY) gain in Spain, both released yesterday, left many in markets questioning just how long the ECB can continue remaining firmly glued to that fence, when it comes to the prospect of raising those Euro-area interest rates. This is especially prevalent when you consider the recent activity (and projected future moves) from other major central banks living with similarly lofty inflation levels.

Rationing

German inflation has not been running at this pace for 40 years or more, and much of the jump can be contributed to that 40% rise in energy prices. The data all came out around the same time as Germany started its preparations to ration gas supplies. The ongoing deadlock with Russia over how they should be paid for the gas, with Russia demanding roubles, has led to the pre-emptive action from Germany, just in-case there is an abrupt halt in supply.

Lagarde still a laggard?

Back on inflation, and the ECB clearly recognised the risks, with Christine Lagarde highlighting during a speech yesterday that Europe was ‘entering a difficult phase’, as she emphasized how rising prices were squeezing consumers’ purchasing power. More worryingly, growth forecasts for the region will also be slashed to bits if Russian energy imports are halted, and that move will also further drive inflation in the region.

Euro rallies

The single currency continues to benefit this week from that dual boost of higher inflation in the region, and increasing prospects for peace in Ukraine. As we approach the end of March, EUR/USD is therefore gyrating towards its March top, which was set at just above 1.1200. That’s an impressive about-turn, given that the pair was just recently struggling to stay above 1.0800. GBP/EUR broke back under 1.1800 yesterday too, which amazingly, is the lowest level traded this year for the pair.

Jobs, jobs and more jobs

The latest ADP (private payroll) data for March, released yesterday, witnessed another 455k U.S job gains, and was broadly in-line with expectations. The news will cement expectations for another healthy payroll report on Friday, even if the correlation has struggled between the two at times recently. U.S Q4 GDP (just) missed on the headline, which did not materially impact the greenback’s fortunes yesterday.

A weaker dollar

Once again, the greenback took its cues from positive market sentiment, and struggled across the board. The dollar index dipped to 97.68, which is the lowest since the beginning of the month. The latest U.S PCE Inflation print is due today, and the big question must be whether it will confirm a potential 50bps rate hike in May, given that the Fed consider the PCE Index as their preferred gauge for measuring U.S inflation. GBP/USD rallied back over 1.3125, and has since meandered back toward 1.3150, but remains somewhat rangebound for now. Today’s UK Q4 GDP print (exp 1%) has the potential to impact the short-term profile for the pound. USD/CAD finally broke below 1.2450, hitting a session low of 1.2430, which represents a new low for 2022. Expectations that the BoC will keep pace with the Fed on rate hikes from here have been a big driver to the recent upsurge in the Loonie. Today’s January GDP release is expected to reflect a 0.2% increase during the month.

What else to watch?

Amongst the other key data to watch today, and after that whopping inflation print yesterday, today’s German Retail Sales will have some added spice. A sharp slowdown is expected after last month’s 2% gains. OPEC are meeting, and the Fed’s Williams and ECB’s De Guindos are both scheduled to give speeches.