The Euro Stabilises, The Dollar Uncertain Till CPI Release

European Central Bank President Christine Lagarde dialed back quick interest rate hikes predictions. Hence, the euro stabilized on Wednesday, off a three-week high. The dollar was unchanged a day before the US consumer pricing data release. It might provide new insights into the Federal Reserve’s monetary tightening path.

Last week, the ECB and the Fed adopted a more hawkish tone. This took markets off the surprise and drove yields on the eurozone and US paper surging amid increased expectations that rates will rise quicker and higher than previously forecast. However, Lagarde maintained on Monday that no more tightening was necessary. She tried to calm mounting expectations for strong action after she hinted for the first time last week that a rate rise this year was possible.

At 0850 GMT, the euro was 0.1% higher at $1.1425, following a slow decline from a high of $1.1483 on Friday, when it reached its highest level since January 14.

Dollar Index Fluctuates

The dollar index measures the greenback against six major counterparts. It barely changed after rallying off a 2-1/2-week bottom of 95.136, down 0.1% at 95.504. It reached a new high of 97.441 at the end of the month, the highest since July 2020. “We see this as short-term volatility, which may be rewarding if played well,” said Jens Norvig Pedersen, FX and rates Strategy head analyst at Danske Bank, referring to the dollar and euro’s ups and downs during the previous two weeks.

“We anticipate the (US inflation) statistics to sustain predictions of Fed hawkishness,” he said. Moreover, he added that rate rise expectations would boost the dollar’s gain in the coming quarters.

According to CME’s FedWatch Tool, markets are pricing in a nearly 70% likelihood of a 25-basis point Fed raises and a nearly 30% possibility of a 50-basis point boost when policymakers meet in March. “Tomorrow’s US CPI announcement will help determine whether the Fed starts with a 25-basis point rise or a 50-basis point move in March,” ING analysts warned investors. According to economists surveyed, consumer prices in the United States rose 7.3% year over year in January.

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