Euro rockets as Lagarde talks hawkish

The euro has posted slight gains in the European session, as it trades around 1.1450. Thursday was an absolute barn-burner, as EUR/USD surged 1.18%, its best one-day performance since December 2020.

Lagarde beats a retreat on rates

The ECB did not raise rates at its meeting on Thursday, but some tweaks in the statement and hawkish comments from ECB President Lagarde were enough to send the euro soaring. Investors snapped up euros as the ECB essentially caved in due to inflationary pressures. Lagarde said that risks to inflation outlook were tilted to the upside in the near term, and acknowledged that inflation would persist longer than previously expected. Lagarde added that inflation was projected to fall in H2 of 2022, but investors weren’t listening as they stampeded out the door to dump dollars and buy euros. The markets also picked up on what Lagarde didn’t say, as she omitted her previous guidance that a rate hike was “very unlikely” in 2022.

If Lagarde, who has been very dovish, intended to show a more hawkish side at the meeting, the markets got the message loud and clear. The markets have now priced in 40 basis points of hikes this year, up from 25 basis points before the ECB decision. The March meeting will be carefully watched as the ECB will release updated economic forecasts, which could impact on the timing of a rate hike.

The US nonfarm payroll report is often the highlight of the trading week, but this time around the markets are more focused on interest rate guidance and next week’s US inflation report. The ADP employment report showed a massive loss of jobs, at -301 thousand. This was the sharpest decline since April 2020, when the Covid pandemic started. The markets aren’t bracing for a repeat from the NFP, but expectations are low, with a consensus of 150 thousand.

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• EUR/USD broke above resistance at 1.1428 on Thursday. Next, we find resistance at 1.1510 and 1.1640
• There is support at 1.1287 and 1.1205

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