- Better risk appetite amid hopes for Russia/Ukraine de-escalation and hot EZ inflation have failed to lift the euro on Wednesday.
- EUR/USD is still trading slightly in the red on the day in the 1.1100 area, having broken key downside support.
Even though risk appetite has taken a decent turn for the better amid hopes that a second round of Russia/Ukraine talks on Wednesday might deliver some much-needed de-escalation, and despite hot Eurozone inflation figures, EUR/USD continues to struggle. The pair hit fresh annual and 22-month lows on Wednesday in the 1.1050s, and though it has subsequently managed to recover back to the 1.110 area, it continues to trade lower on the day by about 0.1%. Now that support above 1.1100 has been cleared, longer-term bears may target an eventual move back to March 2020 lows in the 1.0600s.
The morning’s upside Eurozone inflation surprise which saw the flash February estimate of HICP hit 5.8% YoY (expected 5.4%) and the core measure hit 2.7% (expected 2.3%) was acknowledged by ECB Vice President Louis de Guindos as a negative surprise. Fellow ECB policymaker Nagel warned that monetary policy must be on guard against inflation if price stability requires it. Rising inflationary pressures put the ECB in an awkward position, given some policymakers have pushed for a more dovish normalisation timeline given Ukraine uncertainty in recent days.
Ultimately, the muted reaction of European bond markets to the latest inflation data suggests that markets remain confident that the ECB will be taking a more dovish stance this year than thought two weeks ago. That much is obvious from looking at interest rate expectation sensitive German 2-year yields, which continue to trade near the -0.70% mark on Wednesday having been above -0.40% as recently as mid-February. That likely explains EUR/USD’s failure to mount a meaningful recovery.
Ahead, FX markets are likely to remain choppy on geopolitical headlines, but there is also a barrage of upcoming US data releases and Fed speak to keep an eye on. First up, at 1315GMT, US payroll company ADP will release its estimate of February private employment change. Fed policymaker James Bullard will then be speaking at 1430GMT followed by Fed Chair Jerome Powell’s semi-annual testimony before Congress which starts at 1500GMT.