Talking points in euros
EUR / USD attempts to retrace year-to-date decline following smaller-than-expected decline U.S. Non-Farm Wages (NFP) Report, and data impressions from America could continue to influence the exchange rate amid divergent paths between the European Central Bank (ECB) and the Federal Reserve.
Fundamental forecasts for the euro: neutral
Short-term correction appears to be taking shape in EUR / USD as 199K rise in US employment casts doubt on an imminent Fed rate hike, and renewed restrictions induced by the Omicron variant could force Federal Open Market Committee (FOMC) to delay normalization of monetary policyuncertainty about the economic outlook remained high.“
The ECB faces a similar dilemma amid the growing number of COVID-19 cases in Europe, but signs of persistent inflation could push the Governing Council to develop an exit strategy as president Christine Lagarde et Cie plan to“cease purchases of net assets under the PEPP (Pandemic Eemergency Pto buy Pprogram) end of March 2022.“
It remains to be seen whether the ECB will adjust forward guidance at its next meeting on February 3 as the core Consumer Price Index (CPI) holds 2.6% p.a. for the second month, which is the highest reading since the data series. started in 1997, and regime change speculation could keep EUR / USD in the November range as the “GThe Council stands ready to adjust all of its instruments, as appropriate and in both directions, to ensure that inflation stabilizes at its 2% medium-term target.“
Nonetheless, the update of the US CPI could influence EUR / USD in the coming days, as the overall value is expected to rise to 7.1% from 6.8% in December to mark the highest reading since 1982, and evidence of stronger price growth could trigger a bullish dollar reaction as it puts pressure on the FOMC to implement a rate hike as soon as possible.
That said, EUR / USD may continue to follow the November range over the next few days as it attempts to retrace the decline since the start of the year, but new data from the United States could influence the exchange rate as the Fed prepares. to apply higher interest rates when the ECB is in no rush to normalize its monetary policy.
— Written by David Song, Mint Strategist
Follow me on Twitter at @DavidJSong