Euro continues to drift

The euro has been in calm waters all week and the trend has continued on Thursday, as EUR/USD continues to hug the 1.09 line.

What is the ECB’s game plan?

With inflation designated as public enemy number one, the ECB is no doubt pleased that inflation has fallen for two straight months, dropping to 9.2% in December. Still, this is well above the ECB’s inflation target of 2%, and the newly-hawkish Christine Lagarde has declared that the ECB will “stay the course” to ensure that inflation comes back down.

Lagarde’s tough language is all well and good, but the markets are far from certain that ECB policy makers plan to continue with oversize rate hikes after March. The markets have priced in 50-basis point hikes at the February and March meetings, but what happens after that? ECB member Panetta reportedly said earlier this week the ECB should not commit to any specific rate moves after March.

The ECB will have to decide between increases of 25 or 50 points in May and June, and the decision will likely be determined by economic data, particularly the inflation outlook. The cash rate stands at 2.50%, and the markets are forecasting a terminal rate in the range of 3.25%-3.75%. Eurozone data has surprised to the upside, giving the ECB room to continue hiking rates without worrying about the economic fallout. The fact that an energy crisis failed to materialize is one less headache for the central bank, although the war in Ukraine isn’t going anywhere and is likely to heat up once winter is over.

The US released sharp numbers today, led by GDP for Q4, which came in at 2.9%. This beat the forecast of 2.6% and follows a 3.2% gain in Q3. Unemployment claims fell to 186,000, down from 192,000 and below the consensus of 205,000. Finally, Durable Goods Orders shot up 5.6% in December, rebounding from -2.1% in November and ahead of the 2.5% forecast. EUR/USD lost ground immediately after these releases but has recovered.

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EUR/USD Technical

• EUR/USD is testing support at 1.0907. Below, there is support at 1.0837
• 1.0958 and 1.1028 are the next resistance lines

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