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Euro Reaches 2-Month High After US CPI

The euro has jumped on the currency bandwagon, as the US dollar is in broad retreat. In the North American session, EUR/USD is trading at 1.1438, up 0.63% on the day, its highest level since November 15th.

US dollar slips despite 7% inflation release

With red-hot inflation on the markets’ minds, today’s US CPI report for December was highly anticipated. There were no surprises in either direction, as the headline reading of 7.0% y/y matched the consensus, while the core reading of 5.5% was marginally above the forecast. Despite inflation hitting 40-year highs, investors didn’t let the heady release ruin their optimistic mood, perhaps because they feared even higher inflation numbers. The dollar slipped, while bonds yawned. 

The markets were also soothed by Fed Chair Jerome Powell’s performance on Tuesday, as he assured worried lawmakers that the Fed wouldn’t hesitate to implement additional rate hikes in order to contain inflation. The Fed has taken a hawkish stance of late, doubling the tapering of its asset purchases and promising rate hikes. The markets have heavily priced in three rate hikes over the course of the year, and the burning question for the markets is whether the Fed will raise rates four times in 2022 and whether lift-off will occur in March.

German central bank says inflation not temporary

Joachin Nagel was sworn in as head of Germany’s central bank on Tuesday, and he took the opportunity to challenge the ECB’s stance that high inflationary pressures will ease. Nagel said that the surge in eurozone inflation was not entirely temporary and warned that inflation could persist at high levels longer than expected.

Nagel’s stark message comes after eurozone inflation hit 5% in December. ECB President Christine Lagarde has downplayed high inflation, insisting that surging energy prices are the driver behind high inflation. The ECB has projected inflation at 3.2% in 2022 and expects it to fall to the bank’s 2% target by the end of 2022. The Bundesbank has not supported the ECB’s ultra-accommodative policy, and Nagel can be expected to continue to challenge Lagarde on policy, especially if inflation continues to climb.

EUR/USD Technical

  • EUR/USD has support at 1.1296. Below, there is support at 1.1231
  • There is resistance at 1.1402 and 1.1443
EUR/USD

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