Euro calm as data calendar remains light

EUR/USD is almost unchanged on Thursday. The economic calendar is light, with no tier-1 events out of the eurozone. The US releases the ADP employment report and unemployment claims, ahead of the jobs report on Friday.

Will eurozone inflation dip?

German inflation fell sharply in December, falling to 9.6% from 11.3% in November. This was a positive way to end what was a rough 2022 – annual inflation hit 7.9%, its highest level since 1951. France and Italy’s inflation levels also fell and investors are hoping for a repeat performance on Friday, when the eurozone releases the December inflation report.

Eurozone CPI is expected to drop to 9.7%, compared to 10.1% in November. A drop into single digits will be welcome, but much of the decline could be a result of energy subsidies in Germany and elsewhere. ECB President Lagarde has noted that headline inflation could rise once the government subsidies come to an end. Core CPI provides a more accurate indication of whether inflation is really falling, and the forecast is for the core rate to remain unchanged at 5.0%. A decline in the CPI reading will create headlines but is unlikely to sway the central bank from raising rates at the February 2^nd meeting, likely by 50 basis points. The ECB is committed to curbing inflation and is unlikely to ease up on rate hikes until it is convinced that inflation is on a sustained downturn.

The Federal Reserve minutes reiterated the hawkish message that Jerome Powell had for the markets at the December meeting. FOMC members committed to maintaining a restrictive policy while inflation remained unacceptably high, saying that more evidence was needed to show that inflation was on a “sustained downward path to 2 per cent”. The minutes noted that several members warned against “prematurely loosening monetary policy”.

The Fed has been consistent with its hawkish stance for some time, yet there is still a dissonance between the Fed’s message and market pricing. The minutes noted that no FOMC members expect any rate cuts this year, while the markets have priced in a possible small reduction by the end of 2023 and have forecast a funds rate peak at 4.5%-4.75%. The Fed, on the other hand, expects rates to hit 5% or higher. The Fed is not pleased with this disconnect and the minutes contained a warning to the markets not to underestimate the Fed’s resolve to maintain high rates in order to curb inflation.

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EUR/USD Technical

• EUR/USD is putting pressure on support at 1.0566, followed by support at 1.0487
• There is resistance at 1.0636 and 1.0740