Euro takes breather after rough week

The euro is calm on Monday, after enduring a brutal week. The US dollar was broadly higher last week and steamrolled over the euro, as EUR/USD fell 1.72%. On Friday, the euro dropped as low as 1.1121, its lowest level since June 2020.

It is a busy data calendar for the eurozone, which could mean plenty of action for the euro this week. The ECB holds its policy meeting on Thursday. The central bank is expected to maintain rates, but ECB President Lagarde could provide guidance on when rate hikes could occur. Lagarde has been quite dovish when it comes to eurozone inflation, saying that the rise in inflation is transient (sound familiar? Think Jerome Powell).

Earlier in the day, German CPI for January came in at 4.9% y/y. This was unchanged from November, but somewhat higher than the consensus of 4.3%. It will be interesting to see if Lagarde stays true to her stance or acknowledges at the upcoming meeting that inflation has become more persistent than the ECB expected.

The US delivered some mixed December data on Friday. The Core PCE Price Index, the Fed’s preferred inflation indicator, climbed 4.9% y/y, up from 4.7% and above the forecast of 4.8%. This was the highest gain since 1983 and reinforces expectations that the Fed will act aggressively to curb surging inflation. At the same time, consumer numbers were on the soft side. Personal income rose 0.3% m/m, below the 0.4% consensus. Consumer spending declined by -0.6%, less than the forecast of -0.7%. As well, UoM Consumer Sentiment fell from 68.8 to 67.4, its lowest reading since 2011.

It is almost a given that the Fed will raise rates at the March meeting, but if you’re unclear on what happens after that, you are not alone. The markets have priced in five rates hikes in 2022 (up from four), but economists are nowhere near a  consensus, with forecasts ranging as low as three rate hikes and as high as seven. The Fed will need to provide some clarity to this confusion, otherwise, we can expect volatility in the financial markets.

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• There is resistance at 1.1287, followed by 1.1428
• There is support at 1.1064 and 1.0982

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