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The phrase "whoever starts wins" highlights the significance of a well-executed beginning. In this context, the Euro commenced on a weak note. German consumer prices in February declined from 2.9% to 2.5% YoY, marking the lowest level since June 2021. The actual figure fell below the anticipated 2.6% forecast by Bloomberg experts. This trend in the Consumer Price Index (CPI) suggests that the European Central Bank (ECB) might initiate interest rate cuts before June. Therefore, the decline in quotes for the EUR/USD in response to German statistics comes as no surprise.
While the data seems positive for the doves of the Governing Council, the core inflation has stabilized at 3.4%, with services inflation remaining anchored at that level. On a monthly basis, consumer prices recorded a 0.5% increase, surpassing the forecast of 0.4%. The Harmonized CPI, at 2.7%, aligned with the estimates. Consequently, the statistics are more nuanced than they may appear initially. It's important to note that Germany represents only a part of the entire Eurozone. Investors are likely to exercise caution and await the release of European inflation data before making long-term conclusions.
Dynamics of harmonized inflation in Germany
This caution is particularly relevant as the market's focus has shifted towards the speeches of Joachim Nagel and statistics on American PCE for January. Nagel, the President of the Bundesbank and considered a hawk on the Governing Council, holds a contrasting view. His Austrian counterpart, Robert Holzmann, anticipates no serious discussions about rate cuts by ECB officials before June. According to him, the European Central Bank should follow the lead of the Fed in the path of monetary expansion.
In contrast to German inflation, the American counterpart aligned precisely with experts' projections. The Personal Consumption Expenditures Index decelerated from 2.6% to 2.4%, while the core PCE adjusted from 2.9% to 2.8% YoY. Investors were not caught off guard by the heightened monthly dynamics of the indicators, as this aspect had already been factored into EUR/USD quotes. Anticipating more robust statistics that could elevate the risks of inflation divergence, investors opted not to wait and promptly initiated the sale of the U.S. dollar.
Consumer spending and inflation in the United States
Thus, releases of data on German CPI and American PCE have set the main currency pair in motion. However, neither the bears nor the bulls gained an advantage. The market still expects the start of monetary expansion by both the Fed and the ECB in June. Derivatives predict a 75 bps reduction in the federal funds rate and a 90 bps reduction in deposit rates in 2024. A higher pace of monetary policy easing in Frankfurt allows selling EUR/USD.
The main currency pair may come under pressure due to a more significant slowdown in European inflation in February and the ECB's lowering of forecasts at the March meeting.
Technically, on the EUR/USD daily chart, the bulls may find the strength to attempt playing a pin bar for the second time in a row. Therefore, storming resistance at 1.0845 could lead to an increase in quotes. However, if this attempt fails as well, there will be a reason to sell the euro at the market rate or when updating the local high at $1.082.
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