EUR/USD drifting continues

The euro continues to have a very quiet week, as EUR/USD appears content to trade around the 1.08 line.

Lagarde brings her message to Davos

It’s difficult to think of ECB President Lagarde as a hawk, as she ignored rising inflation in the eurozone for a long period, insisting that it was transitory. The ECB was late to the global tightening party and found itself scrambling to curb inflation. The new Lagarde has become more hawkish and hasn’t shied away from making strong statements, such as warning the markets not to underestimate the ECB’s rate policy. Lagarde has brought her hawkish message to Davos this week, saying that inflation remains “way too high” and that the ECB would stay the course until inflation returns to 2%. With inflation currently at 9.2%, that promises to be a slow process.

The ECB is widely expected to raise rates by 50 basis points in February, but what happens after that isn’t clear. The eurozone economy is holding up fairly well despite the Ukraine war and the feared energy crisis appears to have been averted, thanks to a warm winter and diversification efforts. The question going forward is whether the ECB will respond to the positive economic environment with a smaller hike of 25 bp or will it keep the pedal on 50-bp increases in order to ensure that inflation does not become entrenched. Lagarde said in December that the Bank would determine future rate moves based on data and that it was very possible that more 50-bp increases were coming after February. ECB members are divided on the issue, leaving the markets uncertain about what will happen at the March meeting.

The Federal Reserve begins a two-week blackout period after today, ahead of the rate meeting on February 1^st. This means that public comments or interviews from Fed officials will be sharply limited. Fed member Brainard spoke on Thursday and echoed the Fed’s hawkish stance. Brainard said that rates needed to remain high even with signs that inflation was starting to ease. The Fed dot plot indicates that rates will peak at 5.1%, while the markets have priced a peak at around 4.75%. We’ll hear from Fed members Harker and Waller later today.

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EUR/USD Technical

• 1.0780 is a weak support line. Below, there is support at 1.0691
• 1.0921 and 1.1010 are the next resistance lines

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