Forex: Euro, US Dollar Volatility After ZEW and CPI Data May Be Muted

Talking Points:

Euro May Not Find Volatility in Soft German ZEW Survey Data Set
US Dollar Might Shrug Off Soft Headline CPI on Stable Core Print
FX Markets to Struggle With Directional Conviction Before FOMC

The March edition of Germany’s ZEW Survey of investor confidence headlines the economic calendar in European hours. Expectations suggest the forward-looking Expectations index will fall for a third consecutive month to register at 52.0, the lowest since September 2013. Euro strength since the beginning of February has mirrored a shift away from expectations favoring expansion of ECB stimulus efforts in investors’ priced-in 12-month policy outlook (as tracked by Credit Swiss). It seems difficult to imagine that a softer sentiment reading will meaningfully derail this dynamic after yesterday’s downgrade of headline CPI – a far more direct indicator for monetary policy – failed to yield a response.

In fairness however, the single currency’s resilience might have been rooted in ebbing Crimea-linked jitters. If a soft ZEW print encourages the markets to turn their attention to economic fundamentals once again, the single currency’s performance since the start of the week may begin to appear unreasonable and trigger selling pressure. This seems like a long-shot however considering the ECB’s apparent determination to withhold accommodation despite the weakest price growth rate since late 2009. We continue to think Mario Draghi and company will have to push back against disinflation but the policy change is likely to wait until the completion of the central bank’s Asset Quality Review (AQR) in the second half of the year.

Later in the day, the spotlight will shift to February’s US CPI figures. The benchmark year-on-year inflation rate is expected to tick lower to 1.2 percent after hitting a six-month high at 1.6 percent in January. Leading ISM data bolsters the probability of softer pricing trends last month. Importantly, the core CPI reading (which excludes the cost of volatile items like fuel and fresh food) is expected to remain unchanged at 1.6 percent. If that proves to be the case, a softer headline print may do relatively little to derail Fed “tapering” expectations and thereby hurt the US Dollar. In any case, traders may be reluctant to commit to a directional bias on the greenback before seeing the outcome of the FOMC policy meeting.

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Asia Session

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CCY

EVENT

ACT

EXP

0:30

AUD

RBA March Meeting Minutes

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1:30

CNY

China February Property Prices

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6:00

JPY

Machine Tool Orders (YoY) (FEB F)

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26.0%

European Session

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CCY

EVENT

EXP

IMPACT