EUR/USD Skyrockets Despite ECB Less Hawkish

The ECB maintains its policy of low interest rates amid rising inflation. EUR/USD remains up on rising expectations of the ECB's commitment changes.

The European Central Bank (ECB) did not change its interest rate even though Eurozone inflation experienced a significant increase. Refinancing Rate is still at 0% level, while Deposit Rate is still -0.5%.

Eurozone inflation for January was reported to have broken 5.1%, more than double the ECB's target. However, ECB President Christine Lagarde said she was in no rush to take new action. On the other hand, they also did not want to comment that an increase in interest rates is not possible this year. Inflation is the main issue that is now being highlighted by the ECB.

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"Inflation is likely to continue to rise for longer than expected, but will also decline this year," Lagarde said. He added that the latest rise in inflation was largely due to a spike in energy and food prices.
"Compared to our expectations in December, the risk of the inflation outlook is likely to increase, particularly in the near term. If this inflationary impulse contributes to higher wages than anticipated or can quickly reverse the economy to full capacity, inflation could be even higher," he added. Lagarde, "We've had a serious and in-depth discussion on inflation... We're focused on the latest information we have, as well as the impact it will have on our medium-term outlook."

EUR/USD Rises, Markets Expect ECB to Follow The Fed

The euro strengthened versus the US dollar after the ECB's policy announcement today. As of writing on Thursday (03/February) evening, EUR/USD was up 1.17% to 1.1434, its highest level in two weeks. Analysts observe that this indicates rising market expectations for the ECB's chances to keep up with the Fed's pace of tightening. However, if you look at the factors that boosted Eurozone inflation, this expectation is not supported by convincing reasons.

"Higher and sustained euro zone inflation will increase the pressure on the ECB to follow the lead of the Fed which promised a hawkish move," said Cedric Gemehl, economist at Gavekal Research quoted by CNBC. and limited supply, not high demand. This suggests that the ECB will continue to focus on returning policy to pre-pandemic mode. So, prospects for a hawkish turn are still far away."