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Christine Lagarde, President of the European Central Bank, startled market participants by taking a hawkish position.
The United States added 467,500 new jobs in January, well above market estimates.
If EUR/USD falls below 1.1400, it will be difficult to prolong its recent surge.
The EUR/USD pair gained the most pips in a week since March 2020, gaining around 350 pips to reach a new 2022 high of 1.1483, and is presently trading around 1.1430. Following the European Central Bank’s monetary policy meeting, President Christine Lagarde startled market participants with her hawkish tone, despite the delivery of a modestly dovish statement.
The record inflation reached in January was noted by Lagarde & Co. According to Eurostat, consumer prices in the eurozone grew by a record 5.1 percent year on year, above the 4.4 percent predicted and exceeding the 5 percent figure in December. The early estimate for German inflation in the same time was 4.9 percent, which was also significantly higher than the market’s forecasts.
The ECB’s hawkishness is masked by the optimistic US NFP.
The central bank’s February announcement matched the one issued in December, promising unchanged interest rates and the conclusion of PEPP purchases in March. The ECB maintained that it will increase purchases under the APP programme, which will begin to decline in October. It’s worth noticing that policymakers omitted the phrase “in either direction” from the statement about being willing to alter monetary policy as appropriate.
President Lagarde, on the other hand, made her most hawkish comment to date. Not only did she voice rational concerns about rising inflationary pressures, noting that “compared with our views in December, risks to the inflation outlook are weighted to the upside, particularly in the short term,” but she also avoided indicating that a rate rise this year is improbable.
Market participants hurried to price in a rate rise before the end of 2022.
As a result, government bond yields have skyrocketed. The German 2-year bund yield increased by more than 30 basis points this week, the largest increase in almost a decade, while the US 2-year Treasury rate surpassed 1.20 percent. Longer-term bond rates rose as well, but not enough to boost demand for the US dollar.
Macro data has ups and downs.
Across the pond, employment-related statistics from the United States weighed on the dollar in the middle of the week. The ADP poll of private job creation revealed a 301K loss, well above the 207K new positions predicted. Q4 Unit Labor Cost increased by 0.3 percent, significantly below the previous 9.3 percent and the 1.5 percent projected, while Nonfarm Productivity increased by 6.6 percent, above forecasts.
The US dollar recovered on Friday with the release of the January Nonfarm Payrolls data. Investors were expecting a mediocre result, but the US added 467K new jobs, more than double the projected 150K. The unemployment rate increased to 4%, but the participation rate increased to 62.2 percent, indicating a robust recovery in the industry.
The Nonfarm Payrolls report came to remind market participants of the US Federal Reserve’s hawkish posture, which significantly outweighed Lagarde’s statements.
Other macroeconomic data released recently revealed that major countries are still failing to recover to pre-pandemic levels of growth. The first estimate of the EU Q4 GDP came in at 0.3 percent QoQ, as predicted, significantly lower than the final Q3 figure of 2.3 percent. Retail sales in the Union fell unexpectedly by 3.0 percent month on month, as Markit revised its January PMI estimates downward. German data experienced the same fate, despite the fact that Factory Orders in the nation increased by 2.8 percent month on month in December.
The US will publish the final estimate of the January Consumer Price Index and the preliminary estimate of the February Michigan Consumer Sentiment Index this week, but there will be no macroeconomic disclosures. Germany will also release the final reading of its January consumer price index.