Volatility eases ahead of ECB rate decision, US inflation

European stocks point to a mixed but calmer start following yesterday’s rebound. Inflation is in focus with the ECB rate decision and US CPI data due.

• Zelensky is willing to meet some Russian demands in peace talks
• The ECB is expected to keep monetary policy unchanged but could sound more dovish
• US CPI is expected to rise to 7.9%

European bourses bounded higher in the previous session, with the DAX gaining almost 8%, the CAC rallying 7%, and the FTSE retaking 7000, on the back of hopes for a diplomatic solution to the Ukraine crisis. Both Russia and Ukraine showed a softening in tone, with Ukraine saying that it is open to neutrality, which boosted optimism surrounding the third round of peace talks today.

It’s possible that the markets have jumped the gun in hopes of a speedy and diplomatic end to the war. That said, economic pressure will be piling up on the Russian economy amid the sanctions, as more Western companies such as McDonald’s and Coke Cola pull out and as international rating agencies expect Russia to refuse to pay (i.e. default) on its debt imminently.

Today, the ECB rate decision and US inflation data will also attract plenty of attention.

ECB

EUR/USD jumped 1.6% yesterday in its best one-day performance in 5 years, as risk sentiment returned on the back of the perceived improved relations between Russia and Ukraine. Today, the pair is holding steady ahead of the ECB rate decision at 12:45 GMT. The ECB is not expected to adjust monetary policy this month but could adopt a more supportive stance in light of the expected fallout from the Ukraine crisis.

The ECB was already facing 30-year high inflation of 5.8% even before Russia invaded Ukraine, sending energy prices and, more broadly, commodity prices sky-high. In addition to rising inflation, growth is also expected to take a hit which puts the ECB in the uncomfortable position of navigating policy through stagflation. Given the levels of uncertainty that still surround the war and the fallout from the war, the ECB could adopt a slightly more dovish, supportive stance than last month, but this will be a delicate balancing act.

Should ECB President Lagarde sound too dovish, the hit to the euro could exasperate an already severe inflation issue. The PEPP is expected to end this month, but bond purchases will continue through the APP purchase programme to not withdraw stimulus too quickly. The ECB could push back on rate hike expectations until at least Q1 next year, which could pull the euro lower.

US CPI

The other key event today will be the release of US inflation data. While this already feels somewhat outdated given the expected jump in inflation in the coming months, it still paints a picture of where consumer prices were heading into the new crisis.

Expectations are for inflation to rise to 7.9% YoY in February, up from 7.5%. The Fed will undoubtedly be increasingly concerned over the inflation outlook amid the Russia Ukraine war. The latest comments from the Fed’s Jerome Powell point to the Fed hiking rates by 25 basis points next week, rather than the 50 basis points previously expected. That said, a hotter than forecast inflation print could see the Fed adopt a more aggressive approach to hikes, particularly given the inflation outlook.

The USD has eased back from a 22-month high of 99.60 in the dollar index reached on 7^th March. Hot inflation could see bulls push back up to this level and towards 100.00; meanwhile, stocks could come under pressure.