EUR/USD flatlines below 1.1500 as Eurozone HICP grows below forecasts

• EUR/USD consolidates below 1.1500 on track to its weakest monthly performance since July.
• Eurozone consumer inflation grew below expectations in March.
• Market expectations of ECB rate hikes remain valid, with price pressure well above the bank's2% target.

The EUR/USD’s tame recovery attempts seen earlier on Tuesday have been capped below 1.1490, before the release of softer-than-expected Eurozone Harmonised Index of Consumer Prices (HICP) figures. The release added negative pressure, leaving the pair, which keeps hovering near two-week lows at 1.1465, on track for a nearly 3% sell-off in March.

Preliminary Eurozone inflation data released on Tuesday showed that consumer inflation rose at a 2.5% year-on-year pace in March, below market expectations of a 2.7% increase, yet well above the 1.9% reading seen in February. Month-on-month consumer inflation accelerated to 1.2% in March, twice as much as February’s 0.6% reading.

The core HICP, which strips out the seasonal impact of food and energy prices, eased unexpectedly to a 2.3% year-on-year rate in March, below market expectations of a steady 2.4% reading. 

The impact on the Euro has been limited, as these data do not change the view that the European Central Bank (ECB) will be forced to hike interest rates in the near term, most probably at their April meeting. Consumer prices in the Euro Area have jumped well above the ECB’s 2% target, and are set to continue growing, boosted by escalating energy prices amid the Iran war shock.

ECB President Christine Lagarde confirmed that view last week, assuring that the central bank is ready to raise interest rates, should a projected increase in the Eurozone inflation prove more than a temporary phenomenon.

Meanwhile, the war in the Middle East continues, casting a shadow over financial markets and giving a competitive advantage to the safe-haven US Dollar. A report by the Wall Street Journal suggested that US President Trump might be pondering ending the war soon, even if the Strait of Hormuz remains closed. Publicly, however, Trump has reiterated his threat to obliterate Iran’s energy sites if Tehran does not open the critical waterway, while Iranian authorities deemed US peace proposals as “unrealistic”.

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