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Inflation in the euro area fell to 2.44% year-on-year in March, with price growth in the services sector slowing to 4%. Core inflation also declined due to a sharp slowdown in food price growth to 2.7% on an annual basis. According to the ECB, rising core inflation corresponds to a monthly increase of just over 0.2%, which is still too much to declare control over price growth, especially as average wage growth indicators remain too high.
As food and energy prices have almost returned to normal, the main drivers of price growth are the services sector and wage growth.
At the same time, retail sales volumes have been steadily decreasing, down 0.8% over a year and 3.7% over two years. Given that the services sector accounts for approximately 45% of the eurozone's total GDP, a decline in purchasing power directly points to a potential recession, the likelihood of which increases with each passing month.
However, there are also positive developments, including an unexpected rise in the PMI, with the eurozone's composite PMI exceeding 50 points for the first time since May, reaching 50.3 points in March. This raises hopes for a consumption recovery, but a delcine in retail sales makes it clear that such a recovery is not a close prospect.
The ECB is set to hold a meeting this week. Nothing so far suggests that the regulator will change its plans to leave rates unchanged. The market is looking to June as the date for the first rate cut, but only if inflation continues to cool. Markets anticipate the ECB will explicitly announce its intention to cut rates in June. In this case, the euro will suffer losses. However, the euro could be supported by rising risks in the oil market. After all, higher oil prices could trigger another round of inflation growth, and much will depend on how the ECB assesses these risks.
The euro's bullish momentum is fading. According to the CFTC report, the net long position decreased by $2 billion over the week to $2.3 billion, with the estimated price falling below the long-term average and heading lower.
Any bullish attempts in EUR/USD can be considered corrective. The pair is trading under pressure and the probability of a downward movement is quite high. The pair's bullish run is likely to be limited by the upper boundary of the bearish channel at 1.0890/0900. The nearest target is the 1.0700/20 area, followed by 1.0694. The lower boundary of the channel at 1.0500/50 can be seen as a longer-term target. However, more fundamental signals are needed for such a deep decline.
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