The EUR/USD consolidated its recent gains following a surge in the exchange rate in the wake of the ECB meeting. While the central bank mostly stuck to the script, keeping rates unchanged and QE in place, it did strike a more neutral stance but this will come slowly over a long period of time. Draghi, shrugged off the recent increases in inflation as transitory, and believes there is a need for the current stimulus to remain intact.
EURUSD Daily Charts
European Elections are Here
With anti-EU parties rising in the polls, the markets have become increasingly jittery ahead of key elections in the Netherlands, France and Germany this year. Voting kicks off with the Dutch parliamentary election on March 15 and right wing, anti-immigration candidate Geert Wilders gaining traction. So far, all the parties have ruled out a coalition with Wilders, which means that the Netherlands faces a long period of political uncertainty. The initial market reaction to a Wilders victory is likely to be negative highlighting that Draghi’s stabilizing hand remains necessary for now.
Inflation will highlight the coming week especially in the wake of the ECB’s comments on the recent uptick in prices. Sentiment is expected to rise as German economic performance continues to drive confidence across the European region.
February inflation figures should remain elevated with Spanish levels rising 3% year over year and German up 2.2% year over year. The Eurozone rate is expected to increase to 2% year over year which is in line with the ECB’s upper price stability limit.
The ECB Thinks Inflation is Transitory
The ECB is convinced that the uptick is mainly driven by oil prices and base effects, and with core inflation still low at just 0.9% year over year, the data is not sufficient to prompt a radical change in ECB policy.
The Fed and U.S. Data
The Euro will also face pressure if U.S. data impresses and the Fed surprises with commentary that prices in a third-rate hike into the futures markets. CPI and Retail sales are expected to increase, with the former edging up to 2.6% year over year from 2.5% year over year. Weakness in the auto space is likely to reduce February retail sales which are expected to decline approximately 0.3%.
In addition, some other key releases this week include the February NFIB small business outlook survey for February. It’s showed strong gains of late thanks to Trump’s pro-growth policies. The March Empire State and Philly Fed manufacturing surveys are likely to show a slower pace of expansion than seen in February. The Fed’s February industrial production release is expected to show a 0.2% bounce thanks to the solid indications from the nonfarm payroll report, after January’s 0.3% decline amid weakness in auto sales and utilities.
While Draghi gave the forex markets some hope that the recovery is gaining traction, the lack of inflation will cap additional upside in the EUR/USD. With the Fed on the docket, traders will take their ques from the Fed chair, and see if the FOMC dot plots remain behind the curve.