Ilya Spivak, Currency Analyst at DailyFX, comments
The March edition of Germany’s ZEW Survey of investor confidence headlines the economic calendar in European hours. Expectations suggest the forward-looking Expectations index will fall for a third consecutive month to register at 52.0, the lowest since September 2013. Euro strength since the beginning of February has mirrored a shift away from expectations favoring expansion of ECB stimulus efforts in investors’ priced-in 12-month policy outlook (as tracked by Credit Swiss). It seems difficult to imagine that a softer sentiment reading will meaningfully derail this dynamic after yesterday’s downgrade of headline CPI – a far more direct indicator for monetary policy – failed to yield a response.
Later in the day, the spotlight will shift to February’s US CPI figures. The benchmark year-on-year inflation rate is expected to tick lower to 1.2 percent after hitting a six-month high at 1.6 percent in January. Leading ISM data bolsters the probability of softer pricing trends last month. Importantly, the core CPI reading (which excludes the cost of volatile items like fuel and fresh food) is expected to remain unchanged at 1.6 percent. If that proves to be the case, a softer headline print may do relatively little to derail Fed “tapering” expectations and thereby hurt the US Dollar. In any case, traders may be reluctant to commit to a directional bias on the greenback before seeing the outcome of the FOMC policy meeting.