Strong Bullish Reversal in EUR/USD, With the ECB Expected to Hike by 50bps in 2022
Strong Bullish Reversal, The EUR/USD turned bearish in summer last year, as inflation increased above 5% in the US, which started to get the FED worried that it was getting out of hand. The FED started turning hawkish last year; as it began planning to end the QE program, winding it down by $15 billion a month
Now, expectations are that the FED will hike rates by at least 0.75%; starting with a 50 bps rate hike next month. Inflation has been growing elsewhere too, but it is way below the level in the US; where CPI (consumer price index) inflation has increased to 7.2%. But markets also seem to be getting excited about the fact that the ECB is turning hawkish too. They are; expected to hike rates by 0.50% by the end of the year; and the Euro has turned bullish, so the EUR/USD has climbed around 350 pips in a strong reversal.
Strong Bullish Reversal, The main criterion laid out by the ECB is that they will only hike after ending APP purchases; and unless they want to risk the bond market throwing a fit, they have to manage those expectations well going into the March meeting. I can see the case for a rate move in Q3 or Q4, should inflation pressures continue to keep getting higher; but otherwise, this would certainly be quite a drastic shift by the ECB if they do proceed, compared to how markets are pricing things in at the moment.
EUR/USD Live Chart
ECB CPI Survey of Professional Forecasters – 4 February 2022
- Eurozone inflation seen at 3% in 2022 (ECB projection 3.2%)
- Eurozone inflation seen at 1.8% in 2023 (ECB projection 1.8%)
- Eurozone growth seen at 4.2% in 2022 (ECB projection 4.2%)
- Eurozone growth seen at 2.7% in 2023
It is interesting to note that the longer-term inflation expectations for 2026 were revised upwards to 2.0%, from the previous round. If anything else, this is likely to just underscore the ECB’s conviction; after yesterday’s hawkish shift. But perhaps they have already accounted for the survey results above.
Strong Bullish Reversal, Eurozone December Retail Sales
- December retail sales MoM -3.0% vs -0.5% expected
- November retail sales +1.0%
- Retail sales YoY +2.0% vs +5.1% expected
- Prior sales YoY +7.8%
Euro area retail sales were much weaker than estimated; in December, as rising consumer inflation may be starting to take its toll on spending/consumption, despite the Christmas shopping season. Retail sales of non-food products fell by 5.2% for the month, while internet sales were down by 3.9% for the month.
