The euro continued to be dragged higher by the retreating dollar on Thursday and the single currency got a further lift by a rise in Eurozone inflation. Euro area CPI rose to -0.1% year-on-year in March according to the flash reading from Eurostat. The figure is in line with consensus estimates and is up from -0.2% in February.
More significantly, core CPI, which excludes food and energy, edged up to 0.9% in March from 0.8% the prior month and was also in line with expectations. Another measure, which excludes alcohol and tobacco in addition to food and energy, edged even higher to 1%.
The data is likely to be good news for the European Central Bank, which has been struggling to get inflation close to its 2% target amid falling energy prices and weak demand both globally and across the Eurozone. The euro extended its sharp gains for a fourth day and broke above 1.14 dollars to peak at a 5-month high of 1.1411 dollars.
The US currency, which declined sharply after Fed Chair Janet Yellen reaffirmed her cautious stance on Tuesday, came under further pressure on Thursday due to month-end rebalancing. However, the possibility of the euro obtaining its own upward momentum despite the ECB being in accommodative mode may not seem so far-fetched given some tepid signs of inflationary pressures gaining traction.
Inflation in the services sector across the Eurozone accelerated to 1.3% year-on-year in March from 0.9%, while prices of unprocessed food rose by 1.1% compared to 0.6% in February. The biggest downward pressure came from falling oil prices, which pulled energy prices down to an annual rate of -8.7%. However, with oil prices having recovered by almost 40% since the January trough, energy prices are likely to tick higher soon.
Germany, the Eurozone’s largest economy, may already be experiencing the return of higher prices as monthly CPI jumped by 0.8% in March, beating forecasts of 0.6%. The annual rate increased to 0.3% from 0.0%. But in France, annual inflation in March remained at -0.2% for the third month in a row according to preliminary readings, highlighting the diverse picture across the euro area.
The European Central Bank is unlikely to be alarmed from any pick-up in prices as inflation rates remain far below the ECB’s target of 2%. It’s also too early to tell whether any short-term rebound in inflation would be sustained. But as other central banks such as the Federal Reserve and the Bank of England lower their own outlook on inflation and put on hold plans for a rate hike, the prospect of the euro depreciating further may be diminishing.
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