Euro punches above 1.12

The euro has reversed directions and is back above the 1.1200 level. EUR/USD is trading at 1.1222, up 0.19% on the day.

Where is ECB policy headed? That is no easy question, as we are getting mixed messages from ECB officials. Governor Christine Lagarde has pushed back against market bets of a rate hike in late 2022. Earlier this month, Lagarde said that it was ‘very unlikely’ that the ECB would raise rates in 2022, as inflation was too low. Contrast this stance with that of ECB member Isabel Schnabel, who said this week that “risks to inflation are skewed to the upside”. It is unusual to hear a hawkish view from the dovish ECB, and the markets factored in a 0.10% rate increase in December 2022 following Schnabel’s comments.

ECB expects to end PEPP purchases in March

There is also uncertainty as to the future of the ECB pandemic bond-buying program (PEPP). The bank is expected to announce at its December meeting that it will end bond purchases at the end of March. This stance was reiterated in the ECB minutes on Thursday, which said that based on current developments, the ECB expected to wind up purchases in March.

However, on Wednesday, ECB member Robert Holzmann said that the bank could put the programme on hold rather than abolish it altogether. Holzmann’s comments could be in response to the spike in Covid cases in Germany and other euro area countries. The ECB will have to tread carefully as it assesses the economic outlook. The spike in Covid in Germany and other eurozone countries could undermine the tenuous recovery, while at the same time inflation is at its highest level since 2008 and the ECB may have to reconsider its dovish policy in order to contain inflation.

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 EUR/USD Technical

• 1.1201 is a weak support line. This is followed by support at 1.1118
• There is resistance at 1.1415 and 1.1546

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