The release of Eurozone inflation data shows very rapid price growth, thus strengthening expectations of an ECB rate hike.
The euro suddenly skyrocketed almost 0.5 percent to the range of 1.1320s against the US dollar in the second half of today's European session (2/February). The release of Eurozone inflation data shows very rapid price growth, thus reinforcing expectations of an increase in interest rates and undermining the pessimism of the majority of analysts.
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| EUR/USD Daily chart via TradingView |
Eurostat's preliminary report shows that the Eurozone inflation rate reached 5.1 percent (Year-on-Year) in January 2022, after increasing 5.0 percent in December 2021. Whereas, the previous consensus had expected the inflation rate to weaken to 4.4 percent.
This data erodes the confidence of some market players who think the European Central Bank (ECB) will be the most dovish monetary authority. Although ECB officials assessed the rise in inflation to be temporary, the data seemed to suggest price pressures were stronger than they expected due to expensive energy commodity prices and prolonged supply disruptions. As a consequence, the prospect of an ECB rate hike this year is again open.
Ulrich Leuchtmann, head of forex at Commerzbank, said that money markets are now pricing in the chances of an ECB rate hike in the last quarter of the year. Some market players will expect the ECB to be more hawkish in the announcement of the results of tomorrow's policy meeting. However, he assessed the impact on the euro in the short term will depend on the statement of ECB President Christine Lagarde in the post-meeting press conference.
The release of Eurozone inflation data this time was quite shocking for the forex market. The US dollar index (DXY) was also knocked back by more than 0.4 percent to the 95.80s range, as the index's weighting comes largely from the EUR/USD rate. The direction of the next move will likely be difficult to predict until Lagarde's press conference.
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