EUR/USD took some advantage of a softer USD tone, with the currency pair breaking above 1.37 once again. However, the release of flash Eurozone HICP inflation readings today will take the shine off the EUR given that it will likely support the case for further policy easing at the 6 March European Central Bank policy meeting.
Benign readings for both headline and core inflation estimates are expected to be revealed today, consistent with small cuts in the ECB’s refi rate and strengthened forward guidance. EUR/USD will find strong resistance around its 2014 high at 1.3776.
Japan’s data slate released this morning came in better than expected. The jobless rate held at low level at 3.7% while the jobs to applicants’ ratio increased to 1.04 in a further sign of strengthening job conditions. CPI inflation marked its 8th straight month of gains while industrial production, retail sales and overall household spending beat expectations.
The main take away is that inflation is close to peaking and the risks of further Bank of Japan policy action is rising. This will limit the downside for USD/JPY but further slippage in US yields overnight mean that USD/JPY upside remains restrained. 101.67 – 102.85 is likely to hold as a near term range for the currency pair.
March 2, 2014 at 2:47 pm
As it turned out, the HICP inflation numbers have surprised to the upside, bursting market hopes for a rate cut at the next ECB meeting. It also popped the headline currency above 1.3800, which to me is very expensive Euro given the current environment of Fed tapering and the growing Ukrainian crisis. Any thoughts on whether the latest bout of EUR strength is sustainable?
March 3, 2014 at 9:52 am
Hi William, thanks for your comments. I agree that moves above 1.3800 are unsustainable especially given the escalation of tensions in Ukraine. However, as you note the rise in Eurozone inflation has effectively dimimished the probability of further policy easing. I still think its a matter of when and not if the ECB eases and they may still opt for some liquidity measures at Thursday’s meeting. This may cap the EUR especially if the ECB still delivers a surprise policy move. Even if they don’t move, EUR/USD is still likely to struggle above 1.38 in my view. Regards Mitul