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EUR/USD Latest: Eurozone Inflation Hits 5%, ECB May Have to Re-evaluate Conservative Policy Timelines

EUR/USD Analysis:

  • Eurozone inflation beats estimate and prior reading to reach 5%
  • Germany’s hot inflation data yesterday prompted a rise in Bund yields. The broader rates markets may revise interest rate expectations upwards as a result
  • EUR/USD Key Technical Levels analyzed

Eurozone Inflation Continues to Climb

The Euro has lagged behind other developed nations as far as expected rate hikes are concerned as the European Central Bank (ECB) continues to provide support for its member states. Presiding over monetary policy for the European Union (EU) is not a simple task as each country has a different economic profile, experiences differing levels of economic activity (GDP) and differing levels of inflation. Therefore, the ECB has the unenviable task of setting a ‘one size fits all’ policy that will hopefully benefit most if not all member states.

However, inflation data in the last 24 hours has revealed that inflation is not just a concern for the larger member states – mainly Germany – but for the Union as a whole. Today’s flash Eurozone CPI figure of 5% reinforces the uptrend in rising inflation which the ECB will look to discuss in their first scheduled meeting of the year on January the 21st.

EU Flash CPI

EUR/USD Latest: Eurozone Inflation Hits 5%, ECB May Have to Re-evaluate Conservative Policy Timelines

Source: DailyFX economic calendar

Today’s data print follows on form yesterday’s German inflation figure which beat not only the forecast and previous figure, coming in at 5.3% vs forecast of 5.1%

German Inflation rate (YoY)

EUR/USD Latest: Eurozone Inflation Hits 5%, ECB May Have to Re-evaluate Conservative Policy Timelines

As a result, there has been a noticeable turnaround and recent uptick in German Bund yields towards the zero mark.

German Bund 10 Year Yield

EUR/USD Latest: Eurozone Inflation Hits 5%, ECB May Have to Re-evaluate Conservative Policy Timelines

Chart prepared by Richard Snow, Refinitiv

EUR/USD Key Technical Themes

The Euro has depreciated significantly over the latter half of 2021 on the back of ultra- bearish monetary policy but persistent inflation that caused the Fed to change its tune, may have the same effect on the ECB members as we kick off the new year. With German yields turning higher could we see wider interest rate expectations elevate, or more likely, support the Euro around current levels?

In the absence of any ECB official commentary supporting further accommodation, we may see a lift in EUR/USD towards the upper side of the ascending channel. The current lack in directionality on the dollar may help support a brief lift in the Euro. Topside resistance sits at 1.1350 with the psychological round number 1.1400 thereafter. Support comes in at 1.2350 before the distant 1.1168.

EUR/USD Daily Chart

EUR/USD Latest: Eurozone Inflation Hits 5%, ECB May Have to Re-evaluate Conservative Policy Timelines

Chart prepared by Richard Snow, IG

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX

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