Euro calm, warning from Bundesbank

It continues to be quiet week for the euro, which is trading around 1.1340 in the European session. The currency markets are nervous and continue to be marked by range trading. For the euro, the risks are towards the downside, especially if German Bund yields run out of steam and stop moving higher. The dollar index has edged lower to 95.86, as it also range-trades between 95.50 and 96.50.

New Bundesbank head hawkish on inflation

Joachin Nagel was sworn in as head of Germany’s central bank on Tuesday, and he didn’t waste a minute challenging the ECB stance on inflation. Nagel said that the surge in eurozone inflation was not entirely temporary and warned that inflation could persist at high levels longer than expected.

Nagel’s stark message comes after eurozone inflation hit 5% in December. ECB President Christine Lagarde has downplayed high inflation, insisting that surging energy prices are the culprit behind high inflation. The ECB has projected inflation at 3.2% in 2022 and says it will ease to the bank’s 2% target by year’s end. The Bundesbank has not supported the ECB’s ultra-accommodative policy and Nagel can be expected to be a thorn in Lagarde’s side, especially if inflation continues to climb.

In the US there are no doubts that inflation is red-hot and this has led to rate-hike fever in the markets. Although projections indicate that inflation will ease back to the 2% target, Wall Street is nervous that the Fed could press that rate trigger as early as March, when it winds up its asset purchase programme. Following the mixed US employment report on Friday, which included a soft NFP, there are expectations for three and even four rate hikes in 2022. The markets are clearly jittery about rate hikes, but market moves in January are often off base, so things should cool down once we move further into 2022.

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 EUR/USD Technical

• EUR/USD has support at 1.1296. Below, there is support at 1.1231
• There is resistance at 1.1402 and 1.1443

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