While the Federal Reserve is preparing another rate cut at the end of April, the European Central Bank (ECB) has enough room to postpone any intervention further into the future. In effect, ECB officials still promote a strong Euro, as a medicine against a rampant inflation. Nonetheless, the technical picture might delineate a different short/medium term scenario for Euro/Usd, if key technical levels are not overcome.
Inflation is aggressive, but the Federal Reserve should cut rates again
In March, the Producer Price Index (PPI) increased 1.1% (+0.6% expected) and the core index moved up 0.2% (+0.4% expected). The long bull trend in all commodity prices, that began in the year 2000, is here to stay. In fact, energy prices rose 2.9% month over month and are now up 20.4 year over year. Foods moved instead +1.2% and increased 5.8% on a yearly basis. Annually, PPI is at 6.9%, only a fraction below January's 7.4%. The Consumer Price Index (CPI) rose instead 0.3% month over month supported by energy products. March's increase was expected, but the core rate shows +2.4% from February +2.3%.
Despite inflation moving higher, the Federal Reserve should again cut rates at the end of this month by 25/50 basis points and probably in the coming months as well, so to bring fed funds rate below 2.00%. Nevertheless, some pauses might be possible to see how the fiscal stimulus package will impact consumer spending. Almost US$ 120 billion will return into taxpayer pocket this summer. Most of the money will be used to repay debt or into saving accounts, but between 15%/25% should support consumes.
In effect, last week Beige Book confirmed that the economic slowdown is increasing over many of Fed districts (9 of 12). How? First, housing remains very weak, even though some improvements in residential mortgage lending by banks has taken place. Second, consumer spending is falling across the country, as credit is fading away. The bright spots of the U.S. economy are tourism, agriculture and the energy sector.