Euro Loses Sparkle Following Eurozone Inflation Undershoot
- Written by: Gary Howes
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Euro exchange rates dim in the wake of inflation numbers.
Eurozone core inflation undershot expectations, ensuring the door to another interest rate cut was left wide open mid-month.
Eurozone inflation edged down to 2.2% year-on-year in March from 2.3% in February said Eurostat, meeting expectations and bringing it closer to the European Central Bank's (ECB) 2.0% target.
"Eurozone inflation is receding as expected and will likely dip below the ECB's target of 2% in the months ahead," says Salomon Fiedler, an economist at Berenberg Bank.
Encouragingly for the central bank, the all-Eurozone measure of core inflation retreated to 2.4% in March from 2.6% in February, representing an undershoot of consensus expectations for 2.5%.
Services inflation fell to 3.4% from 3.7%.
"For the ECB, inflation in the service sector represents the biggest hurdle to further monetary easing. As the upward pressure on prices is also expected to ease in the coming months, the lights are green for further interest rate cuts," says Dr. Thomas Gitzel, Chief Economist at VP Bank.
The Euro vs. Pound (EUR/GBP) edged lower to 0.8364 (-0.12% on the day), the Euro vs. Dollar is down by 0.10% on the day at 1.0805.
The ECB's next interest rate decision is due on April 17th, and the market is now assigning a 72% probability of a rate cut.
By then, the scale of incoming U.S. tariffs will be known, as will any inevitable adjustments the White House will tender.
"The ECB can cut its deposit rate once more by 25bp in Q2 to a terminal rate of 2.25%, with the risk tilted towards an additional such move," says Fiedler.
By the April meeting, the ECB will also know the nature and scale of the Eurozone's counter-tariffs, which will have implications for European import prices.
"The decline is a dovish sign for the ECB ahead of possible trade upsets to the inflation outlook," says Bert Colijn, Chief Economist for the Netherlands at ING Bank.
"All things being equal, today’s inflation print was soft enough to justify another rate cut to get the policy rate more firmly in neutral territory," he adds.
