Global commodity prices have been on the rise recently driven by cold weather in the northern hemisphere and , to a certain degree , weak dollar. Below we assess the risks that the latest bounce pose ahead of the Eurozone inflation print next Friday. We conclude that the latest price spike , if not sustained , may be too small to have a lasting impact on HICP. In addition , EUR appreciation continues YoY and that could limit the impact. Still weak domestic demand in the Eurozone could further mean that the downside risks going into the HICP release remain non-negligible. Investors may adopt a more defensive view on EUR ahead of the data.
The February HICP print next Friday could prove quite important in determining whether the ECB cuts rates or not in March. Market would use any potential downside surprises to add to bets on more ECB easing ahead of the March meeting. Citi economists think that a rate cut to the tune of 10-15bp cannot be excluded if the annual HICP inflation comes in below market expectations of 0.7%. EUR could remain under pressure under this outcome.
By the same token , evidence that inflation held up close to recent lows may not have a significant impact on short rate markets given that they are already pricing in about 50% chance of a rate cut on March 6.
Absent significant disappointments from the German ifo the single currency may even consolidate to a degree."
Valentin Marinov , Head of European G10 FX Strategy at Citi