Preliminary German CPI inflation figures from March came in piping hot at 7.3% YoY and 2.5% MoM, over 1% higher than the consensus had foreseen and nearly 2% higher than in February. Energy price growth jumped to 39.5% YoY, up from 22.5% in February, while food inflation rose to 6.2%.
Still, the impact of the nationwide CPI data in Germany on FX markets was limited. This was largely due to the fact that the signal of a hot inflation print has been drip-fed to markets throughout the course of the day as regional CPI readings outstripped expectations and preliminary Spanish CPI data also showed a circa 2% increase on the month. Meanwhile, markets have already adjusted as short-term interest rates price in around 60bps worth of rate hikes from the European Central Bank by the end of the year. While inflation is substantially higher than expected, it would be hard for markets to justify pricing even more tightening from the ECB without getting more data from other eurozone countries. In that respect, today’s data is likely to consolidate EURUSD around the 1.11 handle for now instead of extending its current rally.
EURUSD and 2Y Bund yield move higher in the lead-up to CPI release, but remain unchanged after the release
Going into the event, data prints from individual German provinces had already been published and gave an idea of what the overall figure for today could look like. At the same time, German consumer confidence reached a new low yesterday that had last been seen in 2009.
This aptly summarises the current predicament for the German economy; soaring inflation and sagging growth.
The stagflationary risk is only exacerbated by concerns over Russian gas delivery, as Germany enters the “early warning phase” of its gas emergency law.
While for now this means government officials will merely monitor the gas supplies from Russia, any escalation could result in government officials restricting energy delivery to German industries in order to continue supplying households. Compared to other countries in the eurozone, Germany is most dependent on Russian energy, increasing economic risks for the nation. ECB President Christine Lagarde commented on the economic outlook this morning and stated there are significant risks to growth and considerable uncertainty over the outlook. This makes the ECB’s job difficult in the months ahead: while a rate hike may soon be imminent due to rising inflationary pressures, and even more so if the war continues, that very rate hike could weigh further on output. Additionally, if a rate hike was delivered at a time when the German economy is teetering on the edge of a recession, the subsequent tightening in financial conditions is likely to be much larger than just the 10bp hike from the central bank. Still, ECB members have refuted the idea of stagflation as they emphasise the flexibility of monetary policy. Whether markets will agree with this, depends largely on the duration of the war and its impact on global supply chains and energy prices, along with overall energy supply to the eurozone. Markets will now turn to tomorrow’s French CPI release and Friday’s eurozone-wide inflation number.
Ima Sammani, FX Market Analyst