EUR/USD: the interest rate equation is increasingly complex

Forex traders came to their senses after a week that was marked by the very early extinguishing of a fire on the banking front and by confirmation of a slowdown in inflation on both sides of the Atlantic. A lift of emotions in the trading rooms, therefore...

In the US, PCE (personal consumption expenditures) prices, excluding food and energy, rose by only 0.2% in February, compared with January's +0.5%. The consensus was for a slowdown in price increases, but not as significant (+0.3%). This should ease the pressure on the Fed, which has had a lot to do in recent weeks to extinguish a fire caused by the Silicon Valley bankruptcy. The justification for a slowdown in its own rate hike is automatically gaining credence, although this trend of deceleration in prices must naturally take place over time. In any case, this PCE figure is all the more impactful as it is the Fed's preferred measure of inflation.

On Friday, traders were noting the slowdown in consumer price inflation across the eurozone following the announcement of a similar trend in Germany and Spain. The annual inflation rate in the euro zone fell in March for the fourth consecutive month, thanks to a lull in energy prices. It stood at 7% over one year, after 8.6% in February, according to Eurostat. However, core inflation (which excludes food and energy prices) rose to 5.6%, which could lead the ECB to raise its rates further.

"The good news is that inflation in the eurozone is falling. The bad news is that the base rate is still rising," says Ulrike Kastens, European Economist at DWS, who expects "inflation rates to fall further in the coming months. However, this does not apply to the core rate, which we believe has not yet peaked. Added to this are higher wage settlements and an increasingly tight labour market. The European Central Bank is expected to respond to this situation with further interest rate hikes."

Right now, the EUR/USD is trading at $1.0908.

KEY CHART ELEMENTS
Around a 50-day moving average (in orange), which is becoming horizontal, technical messages are progressively dual, with no one side getting together. The opinion is therefore neutral on the leading currency pair pending a concordant set of clear chart and technical clues.

MEDIUM TERM FORECAST
Based on the key chart factors we have mentioned, our medium-term view on the EUR/USD is neutral.