Commerzbank’s Thu Lan Nguyen notes that recent Euro strength against the Dollar reflects expectations that the ECB will react more quickly to the latest inflation shock than in 2022. Higher Oil and gas prices are seen feeding into Euro area inflation, with German data key. Nguyen argues this limits EUR/USD downside while the activist ECB narrative holds.

ECB expectations underpin Euro resilience

"The euro area's March inflation figures kick off the G10 nations’ reports that offer an initial indication of the impact of the war in Iran on inflation trends. Today, data from the largest economy, Germany, are due. Analysts surveyed by Bloomberg expect the sharpest monthly increase since 2022."

"In my view, the reaction to the figures is likely to be asymmetrical. If the figures come in weaker than expected, the market will very likely downplay this and cite potential one-off factors as an explanation. Given that crude oil prices are more than 50% higher than prior to the war and fuel and natural gas prices have (at times) risen even more sharply, it is hard to imagine that this will not translate into significantly higher inflation in the foreseeable future - whether a month earlier or later is unlikely to matter much."

"However, if the figures turn out to be even higher than expected, this could fuel fears that inflation will rise even more sharply than the market already fears, and accordingly push the already pronounced expectations of interest rate hikes even higher. This is likely to give the euro a boost against the US dollar, at least in the short term."

"This means that in recent days, as the oil price resumed its upward trend and the dollar gained ground across the board, EUR/USD would have fallen much more sharply if the market did not anticipate such an activist ECB. As long as this picture remains intact, the downside potential for EUR-USD is likely to remain limited. However, as soon as it begins to crack - which we would not rule out - sharper downward swings must be expected again in the event of a renewed escalation of the war."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)