27.03.202314:00 Forex Analysis & Reviews: EUR/USD: IFO indices, strike in Germany, and pending inflation reports

EUR/USD trades within the framework of the 7th figure at the start of a new trading week amid a contradictory fundamental picture. On the one hand, there is an improvement of risk sentiment in the markets: German IFO indices came out in the green zone, and the bankrupt U.S. bank Silicon Valley Bank unexpectedly quickly found a buyer as bank holding company First Citizens Bank & Trust Company agreed to purchase all deposits and loans of SVB. On the other hand, the largest strike started today in Germany, which negated the optimistic estimates from the IFO.

In addition, the fate of the Fed's interest rate is still in limbo—there is no consensus on the market regarding the possible outcome of the May meeting of the Fed. Such a fundamental rebus puzzled EUR/USD traders: judging by Monday's price movements, market participants do not risk opening large positions, either down or up.

IFO optimism and transport strike

The Ifo Business Climate Index for Germany came out in the green zone: in March, it rose to 93.3 points (against the forecast growth of 91.0). The indicator has been demonstrating an upward trend for six consecutive months.

Simultaneously with the release, a large-scale warning strike of transport workers began in Germany today: rail traffic is basically paralyzed in the country, public transport does not run in many federal states, and only Berlin Brandenburg Airport works among the major airports. According to local media, this strike is the largest since 1992. Preliminary data shows it involves about 350,000 transport workers, demanding higher wages. Thus, the trade union Verdi calls for an increase in salaries by 10.5% (but not less than 500 euros per month), and the EVG calls for an increase of 12% (but not less than 650 euros per month). It is noteworthy that the strike is taking place simultaneously with the next round of negotiations between trade unions and representatives of the German authorities. According to the forecasts of the local press, employers will eventually have to agree with the demands of the trade unions to increase wages.

This is bad news for the ECB and good news for the buyers of EUR/USD. As you know, the trend of wage hikes during the inflationary period leads to higher prices, and higher prices lead to higher wages. In other words, all the conditions for the unwinding of the self-reinforcing inflationary spiral are created.

Waiting for Friday's reports

Recall that last week, ECB President Christine Lagarde said she saw no sign of a slowdown in core inflation in the eurozone, and consumer price growth "generally remains strong." In this context, Lagarde added that she would not be barring any further rate hikes or pauses—everything will depend on incoming data.

At the same time, Bundesbank President Joachim Nagel voiced a more straightforward thesis: according to him, the European Central Bank has not yet reached the end of its course to raise interest rates.

Considering the recent events in Germany and the rhetoric of the ECB representatives, we can assume that inflation data, to be released Friday, will largely determine the fate of the ECB interest rate. According to preliminary forecasts, the headline consumer price index in the euro area in annual terms will come out at around 7.1%, reflecting a slowdown in headline inflation. However, the core index, excluding volatile energy and food prices, should rise to a record high of 5.7% in March. It is worth emphasizing that even against the backdrop of a decline in the overall CPI, core inflation will play a decisive role for the ECB, given Lagarde's previous rhetoric. Therefore, if Friday's report comes out at least at the level of forecasts (not to mention the green zone), the likelihood of another ECB rate hike will increase in many respects.

Is the Fed ready for a pause?

According to the CME FedWatch Tool, the probability of maintaining the status quo at the next (May) Fed meeting is now 76%. Accordingly, the chances of a 25-point rate hike are 24%. At the same time, the updated "point" forecast of the Fed assumes another increase in the rate by 25 basis points within the current cycle. St. Louis Fed President James Bullard said on Friday that another rate hike could happen at the next meeting "or shortly thereafter." At the same time, Fed advisor and Chief Economist at KPMG, Diane Swonk, expressed the opposite position—she said that the Fed was "seriously considering the possibility of stopping the tightening of monetary policy against the background of the banking crisis."

Obviously, the scales will tip in one direction or another, depending on the dynamics of inflationary growth in the United States. In this context, the core PCE index, also to be published next Friday, will play a special role. According to preliminary forecasts, the inflation indicator will show a positive trend, rising to 4.8%. In this case, the probability of a 25 bps rate hike will increase: the market will no longer be so sure that the members of the American regulator will maintain the status quo at the May meeting.

Conclusions

As you can see, the fundamental background for the EUR/USD pair is contradictory. There are still several days prior to the abovementioned inflationary releases, so traders have to react to the current information flow (German strike, IFO indices, the deal around the SVB, etc.).

Presumably, against the background of a contradictory information picture, the pair will show sideways movement in the medium term, in the range of 1.0700–1.0810. These price values correspond to the lower and middle lines of the Bollinger Bands indicator on the four-hour chart.