ECB’s Holzmann urges end to QE

The euro is trading quietly in the Friday session. Currently, EUR/USD is trading at 1.1442, down 0.06%.

Euro under pressure from greenback

The US dollar has received a tailwind from this week’s sizzling CPI data. Headline CPI in October came in at 6.2% y/y and core inflation rose 4.6%. This was well above the consensus of 5.9% and 4.3%, respectively. Inflation is red hot, as CPI hit its highest rate since November 1990 and core inflation at its highest since August 1991.

How will the Fed react to the latest inflation report? Fed Chair Jerome Powell has insisted that the current bout of inflation is transitory, but with inflation only heading higher, this message is in danger of falling on deaf ears. The markets are becoming increasingly skeptical of the Fed’s guidance on rate policy and expect the Fed to bring forward its timeline for a rate hike. If inflation continues to climb, we can expect the Fed to become more hawkish – this could mean accelerating the timeline of the Fed taper in order to set the stage for an earlier than expected rate hike.

The ECB, which has been in accommodative mode, may be showing signs of becoming hawkish. ECB member Robert Holzmann said on Thursday that the ECB could wind up its conventional bond-buying plan (APP), which is running at 20 billion euros/month. The ECB has signalled that it will wind up the pandemic asset purchases in March, but policymakers haven’t come to an agreement on what to do with the APP.

Like most major economies, the eurozone is facing higher inflation levels. In October, CPI punched above 4%, well above the ECB’s inflation target of 2%. Governor Christine Lagarde has been dismissive of any chance of a rate hike in the near future, but policymakers will have to give thought to tapering if growth and inflation continue to head upwards.

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