The ECB and its “sources” were more hawkish than expected last week. As a result, EUR/USD rose almost 3% over the week.
The ECB is worried about inflation! What was once the most dovish of central banks has now turned slightly hawkish after last week’s meeting. Christine Lagarde said in her press conference that followed that the inflationary surprises had caused unanimous concern in the board of governors. Also, during the Q&A portion, when given the opportunity, Christine Lagarde did not repeat her comments from December that a rate hike in 2022 is highly unlikely. But perhaps the most hawkish comments came after the meeting of ECB ‘sources’, who said the ECB would prepare for a possible March policy recalibration, is to consider an end to net buying APP in the third quarter and agrees that it is reasonable not to rule out a rate hike in 2022! The change in monetary policy stance helped push the euro higher.
On the geopolitical level, it should be noted that Europe was heavily involved in the negotiations between Russia and Ukraine. Frenchman Macron traveled to Russia on Monday to meet Putin to discuss a de-escalation of troops from the Ukrainian border. German Scholz travels to the United States to meet President Joe Biden to discuss the situation. And Russia, Ukraine, Germany and France will meet later in the week to discuss the issue. Because NATO is heavily involved, if Russia escalates the situation with Ukraine, the euro could fall.
The situation of the US Federal Reserve resembles that of the ECB. The difference is that the United States is further along in the quantitative tightening process. The Fed will end its QE program next month, while the ECB said it would continue to buy bonds through at least the fourth quarter. Furthermore, the Fed has made it clear that the United States has reached peak employment. This was punctuated by last week’s strong nonfarm payrolls report. The US added 467,000 new jobs to the economy in January versus +150,000 expected. Additionally, December’s print has been revised up by 311,000 jobs. The concern for the Fed, as for the ECB, is inflation. Average hourly earnings rose 0.7% MoM vs. 0.5% MoM expected. On Thursday, markets will look to the US CPI. Expectations are 7.3% YoY versus 7.0% YoY previously. The Core CPI is expected to be 5.9% YoY versus 5.5% YoY in December. If the figure is above expectations, it should increase the odds that the Fed will hike by 50 basis points at the March meeting, as opposed to the current expectation of 25 basis points.
Last week, EUR/USD closed 2.72% higher, ranging from 1.1138 to 1.1484. This is the biggest increase since the start of the pandemic in March 2020, when the pair rose more than 4%. On the weekly timeframe, EUR/USD had been in a downtrend since May 2021 and convincingly broke above the upper channel trendline last week.
Source: Tradingview, Pierre X
On a daily basis, EUR/USD traded up to resistance (January highs) near 1.1482 and stopped. Horizontal resistance is at 1.1510 then the 127.2% Fibonacci extension from the January 14th highs to the January 28th lows near 1.1581. Above this price may reach a confluence of resistance at 1.1673/1.1707 . This strong resistance area is made up of the 200-day moving average, the horizontal resistance, and the 161.8% Fibonacci extension from the previously mentioned time frame. Horizontal support lies below at 1.1286 ahead of the upper downtrend line of the long-term channel near 1.1350. The 50-day moving average is below at 1.1319.
Source: Tradingview, Pierre X
The ECB and its “sources” were more hawkish than expected last week. As a result, EUR/USD rose nearly 3% for the week, the most it hasn’t since March 2020. However, the US Fed has also been hawkish, with increasing odds that a rise rates in March could be 50 basis points. rather than the original 25bps expected. Look at the US CPI printout this week. 7.3% YoY is expected. This could lead to additional volatility for EUR/USD.