Euro Slips as Eurozone Inflation Slides

 | Apr 19, 2023 08:21AM ET

  • Eurozone inflation fell to 6.9%, while the core rate rose to 5.7%
  • Goldman Sachs (NYSE:GS) expects ECB rate hike in May
  • EUR/USD has fallen 0.50% and is trading at 1.0920
    • h2 Eurozone inflation drops to 6.9%/h2

    Eurozone inflation numbers were unchanged in the final estimate. Headline inflation dropped to 6.9% in March, down sharply from 8.5% a month earlier. The not-so-good news is that core CPI, which is a more reliable gauge of inflation trends, inched higher to 5.7% in March, up from 5.6% in February. The main reason for the drop in the headline figure was a sharp decrease in energy costs, which are not included in the core rate.

    Core CPI not only moved the wrong way (upwards), but the 5.7% gain was a record high. This will be a major concern for the ECB, which will likely respond to the sticky core rate with another rate hike at the May 4th meeting. The ECB was late to the rate-hiking party and lags behind most major central banks, with a benchmark cash rate of 3.0%.

    Goldman Sachs has now changed its projection for a terminal rate of 3.75%. up from 3.50%. Goldman Sachs noted that inflation remained “very strong” and also cited an easing of tensions over the banking crisis as the reasons for its more hawkish rate projection. As for the upcoming meeting, Goldman Sachs said it was a close call between a 25-bp and a 50-bp increase, although its working assumption is that the ECB will deliver increases in 25-bp increments at the May, June and July meetings.

    The Fed is very likely to raise rates at the May meeting, with an 84% probability according to the CME Group (NASDAQ:CME). On Tuesday, Fed member Bostic said that he expects one more rate hike in May and then a hold policy all the way into 2024. The markets are more dovish and anticipate rate cuts before the end of this year, as inflation falls and the economy cools.