Euro dips lower on soft German retail sales

The euro has reversed directions on Wednesday and is slightly lower. In the European session, EUR/USD is trading at 1.1319, down 0.17% on the day.

Inflation in the eurozone shows no sign of easing anytime soon. In November, CPI rose to 4.9% y/y, the highest level recorded since the euro was formed in 1997. This was up from 4.1% in October. Core CPI showed a similar trend, rising from 2.0% in October to 2.3% in November. The major driver behind the surge in inflation was soaring energy prices.

The headline reading is more than double the ECB’s inflation target of 2 per cent, which raises further doubts in the narrative championed by ECB President Christine Lagarde that high inflation is being driven by temporary factors and will ease in the coming months. Investors have expressed concern that ECB President Christine Lagarde has been too sanguine about the jump in inflation. Lagarde has said that inflation is under control and a result of temporary factors such as high energy prices, but many market participants are sceptical of her stance. Some ECB members have stated that inflation may not ease as quickly as expected. This view was reiterated on Tuesday by Luis de Guindos, vice-president of the ECB. There is growing pressure on the ECB to reduce its monetary stimulus, which should make the December 16^th policy meeting all the more interesting.

Fed Chair Jerome Powell made a hawkish pivot in his testimony before a Senate committee, which surprised the markets. Powell retired the word “transitory” from his description of inflation, a label that the markets essentially discarded months ago. Powell stated that FOMC members would discuss accelerating the unwinding of the taper scheme at the December meeting. The abrupt change in stance by Powell has added to the uncertainty in the markets, which have been shaken by the fear of another Covid wave due to the Omicron variant.

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 EUR/USD Technical

• EUR/USD has support at 1.1229. This is followed by support at 1.1135
• The next resistance lines are 1.1373 and 1.1423

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