Euro steady, punches back above 1.06

The euro has steadied on Friday after sustaining sharp losses on Thursday. In the European session, EUR/USD is trading at 1.0615, up 0.18%.

Lagarde says more hikes could be coming

The markets were treated to somewhat hawkish comments ECB President Lagarde on Thursday, who kept the door open to further rate hikes beyond the expected 50-bp move at the March 16^th meeting. Lagarde said that further rates were possible but that the central bank couldn’t predict the pace and extent of future rate hikes. This sounds like Lagarde is telling the markets to forget about forward guidance, as the ECB will be making its rate decision at each meeting based on economic data. Lagarde has been much more transparent about the need for a rate hike at the March meeting and the markets are expecting the ECB to deliver a 50-bp hike.

Much of the euro’s volatility this week can be attributed to inflation releases. On Wednesday, EUR/USD jumped almost 1% after German inflation edged up to 9.3%, up from 9.2%. The euro reversed directions on Thursday and declined 0.70% after Eurozone CPI dropped to 8.6%, down sharply 9.2%. The rise in German inflation raised concerns that the ECB would respond with another 50-bp hike in May, which boosted the euro. The euro fell on Thursday after eurozone inflation eased, raising the likelihood of a modest 25-bp increase in May. It’s a safe bet that inflation will be a key factor in upcoming rate moves. The markets are braced for more tightening and expect the deposit rate, currently at 2.5%, to hit a peak of 4%.

The week wraps up with US ISM Services PMI, a key release that could shake up the US dollar before the weekend. The PMI rebounded in January with a reading of 55.2, up from 49.6 in December, and the estimate for February stands at 54.5 points. The 50.0 level separates expansion from contraction.

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EUR/USD Technical

• 1.0596 is a weak support line, followed by 1.0486
• There is resistance at 1.0655 and 1.0765