Eurozone flash inflation figures for the month of February are scheduled for release on Wednesday at 1000 GMT. Price pressures are anticipated to ease on an annual basis, with market participants potentially extrapolating from the numbers to what European Central Bank policymakers will likely decide on when they next meet in March.
Headline CPI is projected to grow by 1.2% y/y and core CPI – the measure that excludes volatile food and energy items from its calculations – is forecast to expand by 1.1%. These compare to January’s figures of 1.3% and 1.2% respectively, and should they materialize, they would stand at a distance to the ECB’s target for inflation of below but close to 2% on an annual basis.
Softening oil prices in February are acting as a drag on headline inflation. The core rate, while not targeted by the ECB, has received considerable attention under a Draghi-led ECB and will also be closely monitored by market participants; last month’s acceleration in core CPI was viewed as an encouraging sign.
Tomorrow’s numbers will constitute the last inflation input ahead of the ECB meeting concluding on March 8 and thus the markets might assign a larger weight on them than would otherwise have been the case.
An upside surprise in the readings is expected to lend support to euro/dollar. In this case, the range from 1.2337 to 1.2357, which encapsulates the 61.8% Fibonacci mark of the February 9 to February 16 upleg on the lower bound and the 50-period moving average on the upper, might act as resistance. A data miss though could lead market participants to push further back in time their expectations for further monetary policy tightening by the ECB, spurring short positioning in the euro. Under such a scenario, euro/dollar might find support around the two-week low of 1.2258 that was recorded on February 22. The area around this level was congested in the past and also includes Monday’s near one-week low of 1.2276.
Ahead of tomorrow’s release, Germany, the eurozone’s largest economy, has released its respective figures earlier on Tuesday. Those came in softer than expected and led to euro weakness, though the sell-off in the eurozone’s common currency was fairly limited. Meanwhile, Spain’s inflation numbers came in stronger than analysts projected.
On the policymaking front, it is worthy of mention that in a talk on Monday, ECB President Mario Draghi said that recent volatility in currency markets justifies close monitoring, adding that eurozone economies are expanding at a robust pace, though officials must persistently continue to provide stimulus.
Other risk events for the common currency as the week unfolds are the Italian national elections and the outcome of the vote by the German SPD on whether to revive the party’s "grand coalition" with Chancellor Merkel’s conservative bloc. Both outcomes will be known on March 4, with the odds for the latter being in favor of an endorsement of the coalition deal that was struck a few weeks ago.
Lastly, it should be mentioned that US-related developments and economic releases on the horizon also have the capacity to lead to positioning in the euro/dollar pair. For example, the world’s largest economy will see the release of revised Q4 2017 growth figures on Wednesday, while January’s core personal consumption expenditures (PCE) price index – the Fed’s preferred inflation measure – will be made public on Thursday.
