The euro rose above the 1.1200 threshold against the U.S. dollar in this early week trading. Then that currency climbed again to the 1.1260s range on Tuesday.
This Single Currency is currently supported by the easing market turmoil. Furthermore ,the USD correction, as well as the release of the latest German inflation data.
However, there are some risks emerging from the European Central Bank's (ECB) monetary policy meeting on Thursday. That becomes a concern of so many market participants.
The release of Preliminer German inflation data on Monday showed a growth of 4.9 percent (Year-on-Year) for January 2022. The pace was slower than december's 5.3 percent growth.
However, it was still outperformed the market expectations and remains within its highest range since the early 1990s. Besides that, some other points can be also noted.
Inflation will still high at the start of the year
The inflation report fostered confidence for tge traders who hoped the ECB would be more hawkish. The example is alluding to changes to its bond-buying program or interest rate hikes in its scheduled meetings.
As a result, the euro was boosted slightly higher although ECB officials judged the rise in inflation would only be temporary. This opinion is for sure having the strong base based on the situation.
The ECB's chief economist, Philip Lane, told Verslo žinios on Jan. 25 that inflation would remain high at the start of the year. However, it may fall again towards the end of the year.
That is why; they were (already) clear from the December forecast. Besides that, they also expect that the overall inflation for this year to be around 3.2 percent in the euro area.
The Drop Is Quite Drastically this Time
It will be below 2 percent in 2023 and 2024. Compared to the peak, it's a pretty big drop in the market based on the data before.
The ecb's sluggish inflation expectations led a majority of analysts to expect that the European central bank May not announce a major policy change at its upcoming meeting soon.
The tug-of-war around inflation expectations like this has the potential to make the euro vulnerable to turbulent after the crisis. How this kind of thing is possible?
Announcement of the results of the ECB meeting, both up and down. Soeren Radde, a senior economist at Goldman Sachs, noted in the results of last week's research.
He said that people believe that basic inflation requirements close enough to the target for the ECB. It is especially to raise the Deposit Facility Rate are unlikely to be met in 2022.
The Major Central Bank Is Better for the Monetary Tightening
While a hike in 2023 is possible if the underlying inflation strengthens more than expected so far this year. The analysts are then making some predictions due to the situation like this.
Their baseline forecast remains that the ECB will significantly lag behind other major central banks in terms of monetary tightening. The recent developments support their forecast.
It is especially EUR/USD pair to fall to 1.1000 in the first quarter (2022). It was said bu Lee Hardman as a currency analyst from the MUFG.
The Challenge Faced by the EUR
However, the bearish trend of EUR will face a challenge in the week ahead. It is especially if the ECB doesn’t reject the interest rate increase expectation for this year Just like the forecast of most analysts.
Jane Foley, a Rabobank's chief FX strategist, also argued That there is a huge risk that Governor Lowe will dismiss the market expectations of a progressive rate hike this year.
Meanwhile, this could make AUD/USD weaken in the near term. People expect The AUD/USD to recover to the level of 0.74 towards the end of the year.
