EUR: Core Inflation Disappoints, ECB's Caution and Market Reactions

EUR: Core inflation disappoints

EUR: Core inflation disappoints

Short-date eurozone interest rates got a lift yesterday from the January CPI numbers where core inflation did not fall as much as expected. Our economists make a great point that the European Central Bank could be concerned that companies do have the pricing power to avoid margin pressure and will pass higher wage costs onto the consumer. Hence it makes perfect sense for the ECB to wait until June, when it will have the wage data, to cut interest rates.

EUR/USD did not spend too long under 1.08 at all yesterday. If today’s US NFP figure is indeed benign, then EUR/USD can knock on the door of 1.0875/0900 again. However, one month EUR/USD realised volatility continues to drift around the lows near 6% and low implied volatilities suggest that investors are not expecting a pick-up in FX volatility anytime soon.

Elsewhere, we were a little surprised at how the Riksbank did a full U-turn from one last hike in early 2024 to not ruling out a cut in the first half of this year. Unlike the Bank Of England, the Riksbank clearly seems more confident of its disinflation trend. This could end up proving a SEK negative over coming months and could favour an extension of this year’s GBP/SEK rally – perhaps even to the 13.50 area.

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Topics

Eurozone Short-Date Interest Rates Movement European Central Bank's Concerns on Core Inflation and Pricing Power Impact of January CPI Numbers on Eurozone Interest Rates ECB's Potential Decision to Wait Until June for Interest Rate Cut Analysis of Companies' Pricing Power and Margin Pressure Wage Data Influence on ECB's Interest Rate Decision EUR/USD Performance Amidst Benign US NFP Figures Evaluation of EUR/USD Volatility in the Face of Low Implied Volatilities Riksbank's Surprising U-Turn and Its Implications Contrasting Approaches: Bank of England vs. Riksbank's Disinflation Trend Potential SEK Negative Impact and Its Effects on GBP/SEK Rally Speculation on GBP/SEK Rally Extension to 13.50 Area

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