Despite the European Central Bank’s (ECB) hawkish tilt at its March meeting, the EUR/USD pair slipped below 1.10 as stagflation concerns intensified in Europe and US inflation surged. revived hopes of an acceleration of rate hikes by the Federal Reserve.
The ECB has unexpectedly said that it will accelerate the reduction of its asset purchase program (APP) in the coming months, which could potentially conclude quantitative easing (QE) in the third quarter of this year if inflation data continues to support board expectations. The ECB revised inflation higher this year and next, citing rising energy prices and the consequences of the Russian-Ukrainian war, and signaled that rates could be raised “some time after “the end of QE. The markets are now anticipating two rate hikes in the euro zone by the end of the year.
In the United States, inflation continues to accelerate, reaching 7.9% year on year in February, its highest level since December 1981. Core inflation, which excludes energy and food, has rose to 6.4% year-on-year, its highest level since August 1982. The market now expects almost four cumulative increases of 25 basis points by the June meeting.
Following the release of the inflation report, 10-year US Treasury yields returned to the 2% level, pushing the USD/JPY pair to its highest level since January 2017.
Yesterday’s talks between Russia and Ukraine yielded no tangible results, while European leaders Agreed on the first day of their Versailles summit to ratchet up pressure on Russia via sanctions.
US President Joe Biden is due to speak at 15:15 GMT on the potential severance of normal trade relations with Russia, revoking ‘most favored nation’ status.
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Chart of the day: Is the ECB coming to the rate hike party too late?
Forex Markets Today – March 11, 2022
- In midday trading in London, the US dollar index (DXY) rose 0.2% to 98.62. The euro (EUR) remained stable against the dollar, with EUR/USD trading at 1.097. The British pound (GBP) remained unchanged at $1.309, the lowest since November 2020.
- Safe-haven currencies were mixed, with the Japanese yen (JPY) falling 0.7% and the Swiss franc (CHF) stable against the US dollar.
- The oil-linked Canadian dollar (CAD) was flat at 1.276 against the USD. The Norwegian krone (NOK) rose 0.5% against the US dollar as core inflation in Norway rose more than expected to 2.1% year-on-year in February,
- The high-beta Australian dollar (AUD) underperformed the JPY today, slipping 0.7% after Reserve Bank of Australia Governor Philip Lowe said he did not feel no pressure from the markets to raise interest rates. The New Zealand dollar (NZD) lost 0.4%.
- Central and Eastern European (CEE) currencies extended their losses. The Polish zloty (PLN) lost 0.3% against the euro, mirroring yesterday’s performance. The Hungarian Forint (HUF) was down 0.2%, after falling 1% yesterday. The Czech Koruna (CZK) pair is down 0.2%.
- The Russian Ruble (RUB) gained 9% with USD/RUB falling to 113 this morning as China announced moves to strengthen trade ties with the rouble.
- Emerging market (EM) currencies lost ground against the USD amid rising expectations for a US rate hike. The South African rand (ZAR) and Mexican peso (MXN) fell 0.3%. The Korean Won (KRW) weakened 0.5% and the Turkish Lira (TRY) fell 1%.
Major currencies: Biggest rises and falls today – March 11, 2022
Forex Market Heat Map – March 11, 2022
USD, EUR, GBP snapshot – March 11, 2022
- Headline inflation increased by 0.4 percentage point to 7.9% year-on-year in February 2022, matching the consensus estimate and reaching its highest level since December 1981. Headline inflation Core consumer prices (CPI), which excludes food and energy, rose 0.4%. peaked at 6.4% year on year in February, in line with expectations. Monthly price increases were strongest in out-of-home accommodation (+2.2%), transport (+1.9%) and catering (+1.4%).
- Fed futures are now pricing almost entirely at a 100 basis point (bp) hike for the Federal Reserve’s June meeting, according to the latest CME Group’s FedWatch Tool.
- The ECB amended the timing of its asset purchase program (APP) in the coming months, and will now acquire €40 billion in April, €30 billion in May and €20 billion in June, instead previously planned purchases of €40 billion in 2Q22 and €30 billion in 3Q22, then €20 billion for as long as necessary to reinforce the dovish stance. The ECB also changed the guidance on interest rates, announcing that a decision could come “some time after” the end of QE.
- The economic outlook for the Eurozone has deteriorated due to the conflict in Ukraine, with the ECB now forecast weaker growth and higher inflation this year, as well as more uncertainty. GDP growth is expected to be 3.7% in 2022, but will be 1.4 percentage points lower in the “severe” scenario, which includes higher energy costs and a larger price revision in financial markets . Inflation is expected to average 5.1% in 2022, but would be 2.0 percentage points higher in the “severe” scenario.
- In January 2022, the UK economy grew by 0.8% month on month (mom), the biggest gain in seven months, beating market expectations of a 0.2% gain. The economy grew by 1.1% in the three months to January 2022, above forecasts of 0.8%. Industrial production in the UK rose 0.7% month on month in January 2022, above market expectations of a 0.1% increase.
- Bond sell-offs resumed following the release of US CPI data and the ECB’s hawkish turn. The yield on the 10-year US Treasury rose to 2%. The 10-year gilt yield rose slightly to 1.52%, while German 10-year Bund yields climbed to 0.26%.
EUR/USD technical levels
- High of 52 weeks: 1.2266
- 52 week low: 1.083
- 50-day moving average (1-day chart): 1.1278
- 200-day moving average (1-day chart): 1.1565
- 14-day Relative Strength Index (RSI) (1-day chart): 38
GBP/USD technical levels
- High of 52 weeks: 1.4248
- 52 week low: 1.3079
- 50-day moving average (1-day chart): 1.3493
- 200-day moving average (1-day chart): 1.3630
- 14-day Relative Strength Index (RSI) (1-day chart): 31