Euro drifting as CPI hits 5%

The euro is steady on Thursday, as EUR/USD trades at 1.1330 in the North American session.

Eurozone CPI hits 5.0%

Inflation has been the buzzword across the major economies, boosted by soaring energy costs and supply bottlenecks which have resulted in shortages in some products. In the eurozone, inflation ticked up from 4.9% to 5.0% y/y in December. Core CPI remained at 2.6% y/y. Both of these readings matched the consensus.

With inflation in the bloc rising, albeit not at the same clip as in the US or the UK, the markets have priced in a rate hike in October, but only a small move of 10 basis points. The ECB, however, has not given any signals of shifting from its ultra-accommodative policy and continues to insist that high inflation is “transitory”. Readers will recall that 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 Christine Lagarde follow suit? The ECB President has been dismissive of inflationary pressures, and even though eurozone inflation is rising, she has argued that the ECB will not follow the lead of the Fed, because the economic situation in the eurozone is different. Lagarde doubled down on this stance in a radio interview today, insisting that inflation will slowly decrease in 2022, as high energy prices and supply bottlenecks will ease.

The markets are betting that despite Lagarde’s rhetoric, the ECB will have no choice but to reduce asset purchases and raise rates, following in the footsteps of the Federal Reserve. This hawkish view has led to the recent rise in German bund yields. On Wednesday, the 10-year rate moved into positive territory for the first time since 2019.

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 EUR/USD Technical

• EUR/USD has support at 1.1306 and 1.1197
• There is resistance at 1.1504 and 1.1593

Source: https://www.marketpulse.com/20220120/euro-drifting-cpi-hits-5/