The euro jumped to a new one-week high because inflation in Germany unexpectedly surged in February. This complicated the ECB's goal to struggle against high inflation as CPIs also climbed in other EU countries.
The federal statistics agency Destatis reported that Germany's consumer prices rose to 9.3% in February from a year ago following a 9.2% increase in January. This acceleration is directly driven by the growth in prices of services and food even despite the fact that the authorities took measures to curb utility bills for households. Energy bills reached elevated levels on the back of Russia's aggression in Ukraine which caused bottlenecks in energy supplies to Germany.
Meanwhile, the annual CPI of Germany which is frequently termed the powerhouse of the eurozone's economy rebounded in February. Besides, CPIs in other countries also logged a considerable spike. Higher annual CPIs in France and Spain also caught the market off-guard. Consumer prices in France unexpectedly jumped to a record 7.2% in February from a year ago amid growth in food and services prices. Inflation growth in Spain comes in at 6.1%. Economists share the forecast that consumer prices are set to remain at inflated levels indefinitely.
Soaring inflation in the eurozone forced the market to upgrade the forecast for the ECB's key interest rate. The refi rate might stand at 4.0% in early 2024. The interest rate is now at 2.5%. ECB policymakers warmed the market that the central bank would raise interest rates by another 0.5% in March. Moreover, some policymakers advocate for sharper rate hikes until inflation is firmly brought down to the target level of around 2%. In this context, the regulator will have to tighten its aggressive monetary policy earlier than expected.
Today market participants await the crucial inflation report for the 20 eurozone countries. The reading might surpass expectations. Economists project a slowdown in inflation to 8.3% from 8.6% in January, though the core CPI excluding volatile food and energy prices (which are closely monitored by ECB policymakers) is likely to remain at a record high of 5.3%.
In a recent interview, Bundesbank President Joachim Nagel pointed out that the core inflation pressure remains too high. The realistic scenario is that inflation is likely to decline gradually. The CPI for Germany could range from 6% to 7% on average for the whole of 2023. One thing is clear: a rate hike announced for March will not be the final move. Afterwards, the regulator will have to make further drastic moves to raise interest rates, the banker noted in his interview.
Whereas Joachim Nagel refused to speculate about the deadline of the monetary tightening cycle, his French colleague Francois Villeroy de Galhau said in Paris that it was "desirable" for the ECB that the refi rate would peak by September of this year. The head of the Bank of Italy, Ignazio Visco, said that "there is no doubt that the tightening of the euro zone's monetary policy must continue."
As for the technical picture of EUR/USD, the instrument again came under selling pressure after a nice upward correction. To ensure a further bull market, it is necessary to defend 1.0630 and push the price above 1.0660. From this level, the door will be open to 1.0700 and even update 1.0730. In case EUR/USD declines, I expect activity from large buyers only at the level of 1.0630. If the bulls don't assert themselves there, it would be a good idea to wait until the price falls lower than 1.0590. Once this happens, traders could plan long positions.
Speaking of GBP/USD, the bulls are facing a challenge. To take the lead in the instrument, the buyers have to push the price above 1.2020. Only a breakout of this resistance will reinforce the hope for a further recovery to 1.2070. Then, we could predict a sharper spike to 1.2120. If the bears take control over 1.1970, a breakout of this level will deal a blow to the bulls and push GBP/USD down to 1.1920. Then, the price will head to 1.1870.
