Euro Area Inflation Softens but Supports a 50 Basis Point Hike

It was a relatively busy day on the European economic calendar. Finalized Eurozone inflation figures for January drew interest. With the ECB targeting a 50-basis interest rate hike in March, the finalized numbers needed to be unchanged or hotter than prelim figures.

In January, the euro area annual inflation rate softened from 9.2% to 8.6%, up from a prelim 8.5%.

According to Eurostat,

• Luxembourg (5.8%) and Spain (5.9%) recorded the lowest annual inflation rates, while Latvia (21.4%) registered the largest.
• Food, alcohol, & tobacco (+2.94 percentage points, pp) had the highest contribution followed by energy (+2.17 pp), and services (+1.80 pp).

Despite inflation softening from the October peak annual inflation rate of 10.6%, inflation remained elevated, keeping the pressure on the ECB to continue tightening policy to bring inflation to target.

However, the finalized headline number will unlikely influence beyond March policy moves. In the latest ECB Economic Bulletin, the ECB highlighted that beyond-March policy decisions would be data-dependent and that the ECB will follow a meeting-by-meeting approach. February and March inflation figures will have more sway.

After the latest round of euro area stats, investors need to monitor ECB member speeches. However, with no Executive board members on the calendar to speak, commentary with the media will need consideration. ECB members will need to discuss post-March moves to draw interest.

EUR/USD Response to Euro Area Inflation

Ahead of the inflation numbers, the EUR/USD rose to a high of $1.06278 before sliding to a session low of $1.05873.

In response to the euro area inflation numbers, the EUR/USD slipped to a post-stat low of $1.05874 before steadying.

At the time of writing, the EUR/USD was down 0.13% to $1.05910.

Up Next

It is a busier day on the US economic calendar. Initial jobless claims and Q4 GDP numbers will be in the spotlight. An unexpected fall in jobless claims and an upward revision to GDP numbers would refuel bets of a more hawkish Fed policy outlook.

Following today’s stats, investors should also monitor FOMC member chatter. FOMC Member Bostic will speak today.

While the FOMC meeting minutes were less hawkish than expected, the FOMC meeting preceded the latest round of US economic indicators that fueled bets of a more hawkish Fed policy outlook.

Labor market conditions would need to materially deteriorate for the Fed to take its foot off the gas. Recent stats have put 50-basis point interest rate hikes back on the table.