EURO AREA CORE INFLATION FLASH KEY POINTS:

The core inflation rate in the Euro Area rose for a third successive month hitting a fresh record high of 5.6% in February. the core CPI which excludes prices of energy, food, alcohol and tobacco went up 0.8%. The core number reinforces the idea that without decreases in energy prices inflation remains sticky and adding credence to the recent hawkish rhetoric from ECB policymakers.

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The YoY inflation rate did inch lower to 8.5 percent in February 2023, the lowest since last May, but above market expectations of 8.2 percent. Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in February (15.0%, compared with 14.1% in January), followed by energy (13.7%, compared with 18.9% in January), non-energy industrial goods (6.8%, compared with 6.7% in January) and services (4.8%, compared with 4.4% in January). Looking at the individual countries we had increases from France, Spain and the Netherlands with German inflation remaining steady.

THE BIGGER PICTURE AND THE ECB

The ECB’s job is a tough one given the economic backdrop of the various countries in the Euro area. We have seen the Euro benefit from the repricing of the hiking cycle expected from the ECB this week with further comments from ECB President Christine Lagarde this morning. Lagarde continued to emphasize the importance of a 50bps hike this month while mentioning that inflation is not showing signs of a stable decline.

Looking ahead to the upcoming ECB Meetings and the rest of the year inflation and particular the core inflation data is likely to be a driving force behind the ECB’s decisions with President Lagarde saying that the need for higher rates remains while stating that data will be the driving force. In further comments Lagarde stressed that the Central Bank is unsure as to what the peak rate will be.

Given the recent data and something I have been keen to stress of late is that the majority of inflationary pressure seems to be entrenched in the economy of many countries in the Euro Area with yesterday’s German inflation report supporting this.

MARKET REACTION

EURUSD Daily Chart

Source: TradingView, prepared by Zain Vawda

EURUSD initial reaction saw a 15 pip drop before recovering to trade relatively flat in the aftermath of the release. The pair has declined around 50 pips for the day as the dollar index recovers from yesterday’s decline. Looking at the recent price action EURUSD remains trapped for now between the 1.0500-1.0700 range with a break at this point seeming unlikely. We have seen some Euro appreciation of late against the greenback largely due to the expected 50bps hike from the ECB as well as some repricing of the peak rate expectation from the ECB.

Intraday resistance may be found at 1.0670 level while support on the downside rests at the 1.0600 handle as well as the weekly low at 1.05300 respectively.

— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda