News & Analysis

With inflation already running hot and national inflation prints showing continued pressure on prices, all eyes were on today’s eurozone inflation data for February, which rose to a record of 5.8% YoY up from January’s 5.1%, while the MoM number printed at 0.9%. The core rate, which excludes energy, food, alcohol, and tobacco, leapt to 2.7% YoY up from 2.3% in January and above the consensus of 2.5%.

The record increase in euro area inflation came as European Central Bank policymakers expressed increased concerns around the risk of stagflation in the eurozone, while money markets pushed back their expectations for an ECB rate hike to January 2023. The fact that inflation was already continuously surprising on the upside, even before the war in Ukraine had started, increases fears that inflation will be higher for longer, while higher prices may also restrict economic growth if extended for a prolonged period of time.

This will likely complicate the ECB’s road to normalisation as the central bank weighs risks around the inflation outlook against the eurozone economic growth trajectory.

It will be difficult for the ECB to justify normalisation in a moment of such high uncertainty, which makes it more likely that the ECB will stick to the already announced policy around its bond-buying programmes: an end to the Pandemic Emergency Purchase Programme (PEPP) in March, and an increase in overall asset purchases from €20 to €40bn to offset the impact of the end of PEPP. Today’s reading is the last print the ECB will see before its next policy meeting, however, the recently increased fears around inflation are unlikely to be included in the ECB’s fresh projections in March, as the cut-off for the central bank’s forecasts was several weeks ago. This, along with the ongoing uncertainties, means the ECB’s initial response to the war in Ukraine will be to pause. However, longer-term risks to the inflation outlook remain.

While today’s print was higher than the stale consensus, the increases are broadly in line with the surprises seen in the national prints from Germany and Italy yesterday.

For this reason, along with the fact that much of the focus now is on Russia-Ukraine, today’s inflation data had limited impact on cross-assets.

The German Bund was offered on the margin, while EURUSD was unchanged after the release. However, with EURUSD now having broken past the 1.1090 level, downside risks for the pair remain as the risk profile remains volatile.


Inflation print leaves EURUSD unchanged…

… but sentiment around the pair remains bearish


Ima Sammani, FX Market Analyst


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