Euro rally pauses ahead of ECB

The ECB is expected to maintain monetary policy at today’s meeting, but investors have been snapping up euros ahead of the meeting, with EUR/USD up 1.26% this week. The upswing in eurozone inflation, which was reinforced by the January record-breaking CPI report, has raised expectations that the ECB will implement a rate hike before the end of 2022.

Investors eyeing Lagarde

ECB President Lagarde remains dovish, despite rising inflation, and said last week that the ECB does not plan to act as quickly as the Federal Reserve. Still, the ECB cannot sit idly by if inflation continues to rise, and there is pressure on Lagarde to reduce stimulus. Will Lagarde change her tune at today’s meeting? If she provides a hawkish tweak to guidance, the euro should gain ground. Conversely, if she dismisses the need for tightening, that would sour sentiment towards the euro and likely send the currency lower. Market participants will be combing the rate statement, looking for subtle changes in the wording of the policy statement compared to previous statements, which stated that a rate hike was “very unlikely” in 2022 and that inflation was “transient”.

In the US, the ADP employment report for January showed a sharp decline in job losses, with a read of -301 thousand. This was the sharpest decline since April 2020, when the Covid pandemic started. Still, the reaction of the US dollar was muted since the data was heavily impacted by the Omicron wave. Even without the ADP, expectations for Friday’s nonfarm payroll report are low, with a consensus of 150 thousand. The NFP report is usually the highlight of the week, but this time around investors are more focused on interest rate hikes and the US inflation report next week.

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• EUR/USD is testing support at 1.1287. The next support level is at 1.1205
• There is resistance at 1.1428 and 1.1510

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