Euro area core inflation retreats as YoY print accelerates

The core inflation rate in the Euro Area retreated slightly in April coming in at 5.6% in April down from last month’s print of 5.7%.

The core CPI which excludes prices of energy, food, alcohol and tobacco went down 0.1% following a rise which started in June 2022 when core CPI rested at 3.7%. The core number remains uncomfortably high and despite signs of a slowdown in consumer spending and tightening conditions inflation remains stubborn.

The YoY inflation rate did inch higher to 7.0 percent in April 2023, from March's 13-month low of 6.9 percent. Energy prices rebounded 2.5% vs -0.9% in March and the cost of services rose at a faster 5.2% vs 5.1% in March.

On the other hand, inflation slowed for food, alcohol & tobacco to 13.6% vs 15.5% and non-energy industrial goods 6.2% vs 6.6%. On a monthly basis, consumer prices rose 0.7%, a third straight month of increase.

The ECB’s job is a tough one given the economic backdrop of the various countries in the Euro area. European Central Bank (ECB) policymakers have adopted a largely hawkish rhetoric of late ahead of this week’s meeting.

Earlier this morning we also had the ECB Bank Lending Survey which strengthened the belief of a 25bps hike at Thursday’s meeting.

The lending survey showed substantial tightening by banks in regard to credit standards for both consumers and companies with Eurozone Banks reporting falling demand from companies for credit. Meanwhile consumers and households also felt the brunt of this as rejection rates increased and demand for home loans decreased strongly as consumers remain concerned about the overall confidence and the economic outlook.

The Bank Lending Survey at least provided some indication that we are seeing a more restrictive economy as the effects of rate hikes begin to filter through the economy. However, the slight uptick in the YoY inflation print may continue to play on the minds of ECB policymakers.

Market reaction

EUR/USD daily chart

EUR/USD initial reaction saw a 15 pip drop before recovering to trade relatively flat in the aftermath of the release.

The pair has been hovering near the recent range low around 1.0950 in early European trade as the Euro faced some selling pressure following the release of the Bank Lending Survey this morning. The range between 1.0950 and 1.1050 could hold heading not tomorrows FOMC meeting.

The longer-term picture for EUR/USD remains abit unclear at present as the technicals and fundamentals seem at odds with one another. The daily chart above shows a break of the ascending channel with further downside preferred from a technical standpoint.

As much as the setup looks appealing the heavyweight fundamental data due this week may play a huge role in where EUR/USD heads next. The forward guidance issued by both the Federal Reserve and the ECB could give more clarity on the rate hike paths for both Central Banks as dovish bets on the Fed have seen a fair amount of tempering of late.

Key levels to keep an eye on:

Resistance levels:

• 1.1000
• 1.1050
• 1.1125

Support levels:

• 1.0950
• 1.0900
• 1.0845

This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.