A pause in the risk rally as traders eye key inflation data

Inflation will add spice to the last day of Q1

• Eurozone and US inflation eyed: After German inflation was higher than forecast there is an upside risk to Eurozone HICP.
• USD selling is on pause: The underperformance of the USD on major forex is unwinding slightly this morning.
• Equities rally takes a breath: European indices are mixed today, with US futures a shade higher
• Metals and oil slip back: In commodities, gold and silver have just eased back slightly this morning, with oil also slightly lower.

The focus is back on inflation

The banking crisis has dominated market moves in recent weeks.

However, as no news has been deemed good news, there has been a recovery in sentiment in the past week or so. 

Attention has steadily been turning away from banks and financial stability, back towards what the central banks are supposed to be fighting, inflation.

Today’s Eurozone HICP and US Core PCE will add more basis for positioning where the ECB and US rates moves are headed.

German inflation suggests Eurozone inflation is likely to remain sticky 

With Germany being the largest economy in the euro area, German inflation is always seen as a barometer for the wider Eurozone data. 

German inflation dropped sharply yesterday, with the HICP measure falling to 7.8% from 9.3%.

However, this move came as a result of base effects after prices surged in March last year from soaring energy costs in the wake of the Ukraine war.

The concern is the month-on-month inflation was still very high at +1.1%.

Strip out the volatile energy costs and core Eurozone inflation is forecast to increase again to 5.7% (from 5.6% today).

Anything above this would give the ECB significant cause for concern.

Markets are already positioned for another 50 basis points of rate hikes by the ECB in 2023 (towards 3.50% on the deposit rate). 

A hot inflation reading today could increase this further and also strengthen the EUR.

US core PCE expected to stay steady

The US Core PCE is not the most market-moving of announcements. The US CPI announced a couple of weeks ago tends to get more attention.

The February Core CPI dropped slightly to 5.5%, suggesting that US inflation is gradually unwinding.

So with US Core PCE forecast to remain at 4.7% today, unless there is a dramatic surprise, it could be a fairly quiet reaction.

Markets continue to believe that a May hike is a coin toss (fluctuating around 50% probability on Fed Funds futures). 

However, an upside surprise in the core PCE would bring a May hike more likely and drive a USD positive reaction.

EUR/USD to move, but also watch for gold

So with both the Eurozone and US inflation on the docket today, there is likely to be some elevated volatility in EUR/USD.

However, gold is another mover on inflation data, and with the chart building a consolidation, the next key move may be near. 

EUR/USD

The EUR has been gaining ground over the past couple of weeks. 

The pull above resistance at 1.0800 has re-opened the highs of a medium-term trading range at 1.1033.

There is currently an upside bias to the outlook suggesting buying into near-term weakness:

• A two-week uptrend continues to track the move higher
• The daily RSI is in the low 60s, but also consistently above 50 now
• There is good support between 1.0710/1.0800.

A break above near-term resistance at 1.0930 opens the highs at 1.1033.

Below 1.0710 would turn the market corrective again within the range.  

Gold (XAUUSD)

A consolidation has formed in the past week and a half.

However, this move is holding good support above the $1959 key breakout and could even be potentially forming a “bull pennant” pattern.

• Daily momentum is strong with the RSI consistently above 60.
• The 21 & 55-day moving averages are rising, with a recent “golden cross” reflecting the strong positive outlook.
• Yesterday’s “bullish outside day” points to continued positive intent within the consolidation.

The bulls will be looking for moves above $2000, with the highs between $2003/$2010 needing to be breached to open the upside.

Support at $1934/$1944 remains key.

Support and resistance levels for Forex, Commodities, and Futures/Indices 

Data: MT5/IXOne

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