Euro-zone inflation preview: A slip in Core CPI could add pressure to EUR/USD

The euro-zone publishes its preliminary estimates for inflation numbers for March 2019 on Monday, April 1st, at 9:00. Back in February, the headline Consumer Price Index (CPI) stood at 1.5% YoY while Core CPI was at 1.0%.

The headline number is off the highs around 2% as the fall in oil prices reached consumers. The European Central Bank has a headline inflation target of "2% or a bit below." The recent increase in prices has yet to propagate. However, core CPI remains stubbornly stuck at these low levels.

Early indications point to lower levels. Germany, the largest economy, reported a HICP level of 1.5% YoY in March, below  1.7% in February. HICP is the European-standard number. Spain, the fourth-largest economy, saw an increase from 1.1% to 1.3%, but below 1.5% expected. 

We can expect similar numbers for March, or even lower if the German decline is reflected in most other countries. A drop in the headline number will not be worrying, as oil prices did not reach the previous highs. 

Core CPI could tilt EUR/USD to the downside 

The core number may provide more surprises. A drop of Core CPI below 1% would be worrying for the ECB, especially if the figure approaches the previous lows at 0.7%, something that seems unlikely now. EUR/USD could suffer on a slide to 0.9%. An increase to 1.1% or higher could help the euro.

EUR/USD is at a sensitive point. The euro-zone economies have materially slowed down, and prospects are not promising. The plunge in Markit's German Manufacturing PMI raises fears of a recession. The final manufacturing PMI data for Germany and the whole euro-zone will be published ahead of inflation data and will likely confirm the trend.

The European Central Bank already pushed back on potential rate hikes and announced a new funding scheme for the banks: TLTRO. ECB President Mario Draghi reiterated his stance that risks are tilted to the downside. At the same time, the US economy continues growing at an OK pace, and the greenback also enjoys safe-haven flows on fears of a global recession. 

The trend is going against EUR/USD, and therefore a miss on Core CPI may have a more substantial effect on the pair than an upside surprise. The slow-moving nature of euro/dollar means it is not suffering from oversold conditions.

All in all, the direction of inflation and EUR/USD is down. A small but significant drop in Core CPI below 1% could trigger a downside move, more than any other outcome. 

More: US GDP Quick Analysis: Goldilocks number for the USD and why it can gain most against the euro