Today's German inflation data has raised market expectations for tomorrow's release of Eurozone inflation data while supporting expectations for ECB interest rates and the euro exchange rate.

Thanks to the latest green German inflation data release, the euro was the market's darling during Thursday's (March 30th) European session. EUR/USD soared about 0.5% to the brink of 1.0900, while EUR/GBP and EUR/JPY continued their rally that had been ongoing since yesterday.

eurusdEUR/USD Daily chart via TradingView

Market concerns over the global banking situation have faded, shifting the focus back to the issue of rising inflation and how central banks will address it. Inflation and interest rate expectations continue to be a topic of discussion and influence the movements of major currencies, including Eurozone inflation.

Yesterday's preliminary German inflation data release increased market expectations ahead of the Eurozone inflation data release tomorrow. CPI inflation growth reached 0.8% (Month-over-Month) in March 2023, the same as the inflation growth in February, and exceeded the consensus estimate of 0.7% (Month-over-Month). The annual inflation rate further decreased from 8.7% to 7.4%, slightly above the estimate of 7.3%.

The European Central Bank (ECB) has raised interest rates by 350 basis points since July 2022 to tame the inflation surge. Several ECB officials have reiterated their intention to raise rates again in the next meeting because the underlying factors driving inflation remain persistent. The German inflation data released yesterday confirms this outlook.

"With the ECB squarely focused on core inflation dynamics, our economists' forecast for euro area core inflation to rise to 5.72% in tomorrow's release is unlikely to dissuade the central bank from its current hawkish stance," Goldman Sachs said in a note to clients.

Tomorrow, USD traders will also be focused on similar data. The Personal Consumption Expenditures (PCE) report will draw global market attention, as the PCE price index is the key inflation reference used by the Fed in its policymaking decisions.

"With recession fears fading off, the market's focus is now turning to the upcoming U.S. PCE data later this week, which is seen as the Fed's favourite inflation parameter," said Tina Teng, an analyst with CMC Markets.