The Euro emerged as the second-best performing G10 currency last week, trailing only the Norwegian Krone, despite persistent pressure from elevated energy prices [1]. This performance is attributed to speculation about a potential European Central Bank (ECB) rate hike as early as April, which has driven Euro interest rates higher and provided support for the currency [1]. Danske Bank notes that the upcoming March PMIs for the Euro area are crucial data points this week, as they will offer insight into consumer sentiment following the war in Iran and subsequent energy price increases [1].
Societe Generale emphasizes that the flash March PMIs, scheduled for Tuesday, will be the first significant indicator of how the recent oil shock is impacting Euro area activity and prices [2]. Their macro team expects only a limited decline in the activity index but will closely monitor the price components, as a stronger price shock relative to growth would bolster the ECB's case for early rate hikes [2]. The brent oil price ended last week at around $110 per barrel, which is below its $128 peak from March 2022 during the Russia-Ukraine conflict; however, spot prices for refined products such as jet fuel and diesel are now above their 2022 peaks, with jet fuel notably higher [2].
ECB President Lagarde has adopted a balanced tone, reflecting divisions within the Governing Council, while member Nagel hinted at a possible rate hike in April if inflation risks intensify. Other members have signaled a more measured approach compared to 2022 [1]. Societe Generale recalls that in March 2022, the activity index remained stable while the prices index increased, and expects a similar pattern this time, with limited activity decline and heightened attention on price movements [2].
Both sources highlight the importance of this week's PMIs in shaping market expectations for ECB policy, particularly in the context of ongoing energy price volatility and its impact on inflation and growth [1][2].
CONCLUSION
The Euro's recent strength is driven by speculation of an early ECB rate hike amid surging energy prices, with upcoming PMIs expected to clarify the balance between inflation and growth. Analysts anticipate limited impact on activity but are closely watching price trends, which could influence ECB policy decisions. Market participants remain focused on these data releases for further direction.