Euro dips despite strong mfg. data

The euro has edged lower at the start of the week and dipped below the 1.13 line in the European session. EUR/USD is trading at 1.1315 in the North American session, down 0.25% on the day, as the US dollar is broadly higher.

German PMIs outperform

The week started with strong German data, as PMIs pointed to faster expansion in manufacturing and services for January. Manufacturing PMI rose from 57.4 to 60.5 (57.0 exp.), its highest level in five months. Services PMI climbed back into expansion territory, with a reading of 52.2, after an 18-month low in December of 48.7. The consensus stood at 48.0 points. European Manufacturing PMI also improved, with a reading of 59.0, although the Services PMI underperformed. The improvement in the manufacturing PMIs is a result of an easing in supply disruptions, although price pressures remain high.

The German numbers are encouraging, with the eurozone’s largest economy showing resilience at the start of 2022, despite the Omicron wave which has hampered economic activity.

With inflation in the eurozone rising, the markets have priced in a modest rate hike of 10 basis points in October. The ECB, however, has not given any signals of shifting from its ultra-accommodative policy and continues to insist that high inflation is “transitory”. Fed Chair Powell adhered to this phrase for months in the face of surging inflation, but grudgingly “retired” it from the Fed lexicon in late November. Will ECB President Christine Lagarde, who has been dismissive of eurozone inflation, be forced to make a U-turn as well?

Investors are awaiting the FOMC policy meeting on Wednesday. With inflation running at its highest level in almost 40 years, the Fed is ready to embark on a series of rate hikes, with the likelihood of a March hike at 88%, according to FedWatch. The markets have priced in four rate hikes this year, but will there be more? Goldman Sachs sent out a note on Saturday saying that its baseline forecast stands at four hikes, but the surge in inflation could push the Fed to respond with more rate hikes.

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 EUR/USD Technical

• EUR/USD is putting pressure on support at 1.1285. Below, there is support at 1.1226
• There is resistance at 1.1359 and 1.1418

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