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Euro Hits 9-month High But Pares Gains

The euro has started the week with gains. EUR/USD briefly punched above the 1.09 line earlier today, for the first time since April but has pared these gains.

Tough ECB talk boosts euro

The ECB meets next on February 2nd and is widely expected to raise rates by 50 basis points. What’s the game plan after that? There has been speculation that the central bank might ease up with a 25-bp increase in March, with a Bloomberg report last week noting that although policy makers haven’t made a decision, the likelihood of a 25-basis point hike in March is gaining support.

The ECB has pushed back against this speculation, and the hawkish stance has reassured investors and boosted the euro. ECB President Christine Lagarde said at the Davos forum that inflation was still “way too high” and that the ECB would stay the course until inflation returns to 2%. ECB member Klaas Knot said on Sunday that the ECB should maintain 50-bp hikes at the February and March meetings and that easing the pace of hikes is “still far away”.

The eurozone economy is holding up fairly well despite the Ukraine war and energy prices have fallen, leaving ECB policy makers in a dilemma regarding rate policy. Should the ECB respond to the positive economic environment with smaller hikes of 25 bp or continue with 50-bp increases in order to ensure that inflation does not become entrenched? Lagarde said in December that the Bank would determine future rate moves based on data, and key releases such as inflation and employment reports could determine rate policy after February.

EUR/USD Technical

  • 1.0837 is a weak support line. Below, there is support at 1.0786
  • 1.0907 and 1.0958 are the next resistance lines

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