EUR/USD: Two anchors for the euro: the inflation growth report in the eurozone and the ECB’s banking lending review
May 2, 2023 4:24 pm
The inflation growth data in the eurozone published today failed to support the European currency. The ECB’s banking lending review only fueled the fire, putting additional pressure on EUR/USD. The euro weakened its position against the dollar, falling to the support level of 1.0960 (the middle line of the Bollinger Bands indicator on the daily chart). The greenback, in turn, shows a fighting spirit: the US dollar index drifts near the border of the 102-figure, in the area of three-week highs.
Traders are nervous ahead of this week’s key events: The Federal Reserve will summarize its May meeting tomorrow, and the European Central Bank will do so the day after. It is unnecessary to talk about stable price dynamics in such conditions, as the central banks can significantly “redraw” the fundamental picture for the pair. After all, although experts have crystallized a general opinion on the possible outcomes of the upcoming meetings of the Fed and ECB, intrigue remains. As the Reserve Bank of Australia demonstrated vividly today, central banks still “know how to surprise” with unexpected decisions.
The European inflation growth report
Today in Europe, two important releases were made public. Eurostat published April data on inflation growth in the eurozone countries, and the ECB released its Banking Lending Review.
It turned out that the overall consumer price index, after a 5-month active decline, turned north again in April, rising to 7.0% (in March, the indicator hit a yearly low, reaching the target of 6.9%). However, the core CPI, excluding energy and food prices, showed minimal but downward dynamics. After nine consecutive months of growth (in March, the indicator reached 5.7%), the index ended up at 5.6%. All results coincided with forecast estimates.
The structure of the release indicates that energy costs in the eurozone increased by 2.5% in April after a 0.9% decline in March. Service price growth accelerated to 5.2% (in March – +5.1%). The increase in prices for food, alcohol, and tobacco products slowed down to 13.6% (March – 15.5%) and for industrial goods – to 6.2% (6.6%). The highest annual inflation in April was recorded in Latvia (15%), Slovakia (14%), and Lithuania (13.3%). The lowest growth rates were in Luxembourg (2.7%), Belgium (3.3%), and Spain (3.8%).
It is worth noting that earlier ECB representatives stated that at the May meeting, the regulator would choose between two options: raising the rate by 25 or 50 basis points. Many central bank members clarified that the step size would “largely depend on April’s core inflation.” This was stated, in particular, by the Governor of the Central Bank of Austria, Robert Holzmann, and the Governor of the Central Bank of Belgium, Pierre Wunsch. During her speeches, ECB President Christine Lagarde also repeatedly expressed concern about core inflation dynamics.
Therefore, the fact that the core CPI slowed down to 5.6% from a record 5.7% may restrain the European Central Bank from raising the rate by 50 basis points at once. It is also worth reminding readers that the German consumer price index growth report published last week came out in the “red zone,” reflecting an inflation slowdown in Germany. In particular, the annual HICP, which the ECB prefers to use for measuring inflation, came in at 7.6% in April, while most experts forecasted growth of 7.8%.
Banking Lending Review
The European Central Bank published today’s important report: the Banking Lending Review (BLS). According to the findings of the release, 38% of eurozone banks reported a decline in corporate loan demand in the first quarter of this year.
The ECB noted that access to retail and wholesale financing had “significantly” worsened. The number of loan applications rejected by banks reached its highest level since the regulator began collecting the relevant statistics (since 2015). The review states that the overall level of interest rates “was the main factor in reducing demand for loans in the context of tightening monetary policy.”
At the end of April, the European Central Bank’s chief economist, Philip Lane, stated that the pace and scale of increases would depend on incoming data – specifically, on inflation growth dynamics and the results of the Banking Lending Review.
Conclusions
As we can see, both reports published today did not favor the euro. The EUR/USD pair dropped to the 1.0943 mark, and the Euro Stoxx 50 index turned south, reflecting the negative impact on risk appetite.
However, despite such a combination of fundamental factors, selling the pair still looks risky. In the short term (before the announcement of the results of the Fed’s May meeting), the pair will not leave the 1.0960-1.1070 range, within which it has been trading for the second week already. Therefore, it is advisable to take a wait-and-see position for the pair: as a result of the next two days, the pendulum may swing in favor of either the greenback or the euro.
The material has been provided by InstaForex Company – www.instaforex.com
The inflation growth data in the eurozone published today failed to support the European currency. The ECB’s banking lending review only fueled the fire, putting additional pressure on EUR/USD. The euro weakened its position against the dollar, falling to the support level of 1.0960 (the middle line of the Bollinger Bands indicator on the daily chart). The greenback, in turn, shows a fighting spirit: the US dollar index drifts near the border of the 102-figure, in the area of three-week highs.
Traders are nervous ahead of this week’s key events: The Federal Reserve will summarize its May meeting tomorrow, and the European Central Bank will do so the day after. It is unnecessary to talk about stable price dynamics in such conditions, as the central banks can significantly “redraw” the fundamental picture for the pair. After all, although experts have crystallized a general opinion on the possible outcomes of the upcoming meetings of the Fed and ECB, intrigue remains. As the Reserve Bank of Australia demonstrated vividly today, central banks still “know how to surprise” with unexpected decisions.
The European inflation growth report
Today in Europe, two important releases were made public. Eurostat published April data on inflation growth in the eurozone countries, and the ECB released its Banking Lending Review.
It turned out that the overall consumer price index, after a 5-month active decline, turned north again in April, rising to 7.0% (in March, the indicator hit a yearly low, reaching the target of 6.9%). However, the core CPI, excluding energy and food prices, showed minimal but downward dynamics. After nine consecutive months of growth (in March, the indicator reached 5.7%), the index ended up at 5.6%. All results coincided with forecast estimates.
The structure of the release indicates that energy costs in the eurozone increased by 2.5% in April after a 0.9% decline in March. Service price growth accelerated to 5.2% (in March – +5.1%). The increase in prices for food, alcohol, and tobacco products slowed down to 13.6% (March – 15.5%) and for industrial goods – to 6.2% (6.6%). The highest annual inflation in April was recorded in Latvia (15%), Slovakia (14%), and Lithuania (13.3%). The lowest growth rates were in Luxembourg (2.7%), Belgium (3.3%), and Spain (3.8%).
It is worth noting that earlier ECB representatives stated that at the May meeting, the regulator would choose between two options: raising the rate by 25 or 50 basis points. Many central bank members clarified that the step size would “largely depend on April’s core inflation.” This was stated, in particular, by the Governor of the Central Bank of Austria, Robert Holzmann, and the Governor of the Central Bank of Belgium, Pierre Wunsch. During her speeches, ECB President Christine Lagarde also repeatedly expressed concern about core inflation dynamics.
Therefore, the fact that the core CPI slowed down to 5.6% from a record 5.7% may restrain the European Central Bank from raising the rate by 50 basis points at once. It is also worth reminding readers that the German consumer price index growth report published last week came out in the “red zone,” reflecting an inflation slowdown in Germany. In particular, the annual HICP, which the ECB prefers to use for measuring inflation, came in at 7.6% in April, while most experts forecasted growth of 7.8%.
Banking Lending Review
The European Central Bank published today’s important report: the Banking Lending Review (BLS). According to the findings of the release, 38% of eurozone banks reported a decline in corporate loan demand in the first quarter of this year.
The ECB noted that access to retail and wholesale financing had “significantly” worsened. The number of loan applications rejected by banks reached its highest level since the regulator began collecting the relevant statistics (since 2015). The review states that the overall level of interest rates “was the main factor in reducing demand for loans in the context of tightening monetary policy.”
At the end of April, the European Central Bank’s chief economist, Philip Lane, stated that the pace and scale of increases would depend on incoming data – specifically, on inflation growth dynamics and the results of the Banking Lending Review.
Conclusions
As we can see, both reports published today did not favor the euro. The EUR/USD pair dropped to the 1.0943 mark, and the Euro Stoxx 50 index turned south, reflecting the negative impact on risk appetite.
However, despite such a combination of fundamental factors, selling the pair still looks risky. In the short term (before the announcement of the results of the Fed’s May meeting), the pair will not leave the 1.0960-1.1070 range, within which it has been trading for the second week already. Therefore, it is advisable to take a wait-and-see position for the pair: as a result of the next two days, the pendulum may swing in favor of either the greenback or the euro.
The material has been provided by InstaForex Company – www.instaforex.com
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