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EU Prelim Inflation Ahead of ECB Meeting

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Tomorrow sees the release of preliminary CPI figures from the Eurozone for the month of March. Typically the figure is not revised much for the final result, so the market generally takes its cue from the first look at the data. Also, this is the last major data before the ECB meets next week, so it could be pivotal for determining what will happen in terms of monetary policy.

Ahead of the pre-rate decision blackout, ECB officials have struck a notably dovish tone. This is after the ECB cut its outlook for  the EU inflation this year, a move that was interpreted by many in the market as a sign that rate cuts will start in June. Some members, such as noted dove Francois Villeroy of France, suggested that a cut could happen even sooner. Even the ultra-hawk Robert Holzmann of Austria, said that the ECB might cut before the Fed.

What Could Happen

With expectations building around just when the first amount of easing will happen, there is a substantial amount of disagreement among analysts on the timing. While the market is pricing in a rate cut in June, it’s only by a small majority. And there is almost as much of a chance of a rate cut in May as there is in July.

Even when it comes to the upcoming data, analysts are divided. While the consensus is that the EU inflation will have come down once more in March, economists are not all that sure. Goldman Sachs, for example, sees inflation actually rising in March, pointing to energy costs, logistics and food prices. Taken together, that means there could be more volatility when the figures are released tomorrow.

What to Look Out For

Usually, the markets take their cues for the Eurozone data from the figures released from Germany and France the days before. But the intervening holidays and the wide range in the forecasts means that might not be the case this time around. Particularly considering that the German economy has deviated from the rest of the Euro Area’s, and recent German data has not correlated well with the whole of the shared economy.

The consensus is that headline CPI will tick down to 2.5% from 2.6% in February. That would be seen as keeping the ECB on track to cut in June. But there are plenty of economists who suggest the inflation rate could remain unchanged at 2.6%. That doesn’t necessarily threaten a June cut, but it could initially shake up the market.

The Headline and the Underlying

Core  the EU inflation is expected to come down to 2.8% from 3.1% prior, a strong downward pace that is seen as providing justification for easing from the ECB. The issue is that the shared central bank doesn’t have a specific mandate to focus on core inflation, and there has been a lot of talk about the headline rate being more important in the current context.

A divergence in the figures – core coming down while the headline stays largely unchanged – could leave the market in an uncertain position ahead of the ECB meeting. Generally, the thought is that the central bank will put more weight on the core reading. But the recent cautious comments from many of the members about being “near” as opposed to “at” the objectives could lead to the conclusion that it’s too early to think about easing. And that might give the Euro a bounce.

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