Euro snoozes ahead of Christmas

The euro is having a quiet day, trading around 1.1320 in the North American session. There are no tier-1 events out of the eurozone for the remainder of the week and German banks are closed on Friday, so we can expect the rest of the week to be uneventful.

The ECB has pledged to continue its dovish monetary policy, unfazed by the fact that the Federal Reserve and the Bank of England are moving in the opposite direction and are tightening policy. One of the key reasons for the divergence of policy is that inflation is red-hot in the US and UK, but has risen more moderately in Europe. We are seeing inflation figures of 6% in the US and 5% in the UK, which has forced the central banks to acknowledge that high inflation is not temporary – the Fed recently abandoned this stance and ‘retired’ the term “transitory inflation”. With inflation running at around 3% in the eurozone, the issue has been less of a headache for the ECB than the Fed or BoE.

ECB inflation – transitory?

ECB President Christine Lagarde has dismissed the threat of high inflation in the eurozone, but this view is being questioned within the bank. Earlier in the week, ECB vice-president Luis de Guindos admitted that inflation had been more persistent and “not as temporary as we expected”. The ECB is projecting inflation to remain above 3% in 2022 and drop below the bank’s 2% target by the end of next year. Higher inflation has prompted the bank to scale back its emergency Covid stimulus scheme (PEPP), but at the same time, it has doubled another QE programme, the APP. All indications are that the ECB will not jump on the central bank bandwagon and raise interest rates anytime soon.

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 EUR/USD Technical

• EUR/USD has support at 1.1245. Below, there is support at 1.1173
• There is weak resistance at 1.1324. The next resistance line is at 1.1427

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