Record inflation in the euro area, EUR / USD is back above 1,13

It was a shock. In January, HICP inflation in the euro area rose to a record 5,1%. Y / Y, while economists expected its spectacular decline. The ECB has a big problem. Expectations for interest rate hikes are growing, and with them EUR / USD exchange rate.

Inflation data and market expectations

HICP inflation in January, according to the published today by Eurostat preliminary estimates, rose to a record 5,1 percent. YoY from 5% in December. The data shocked the market. Not only because in the 7th consecutive month inflation surprised with its increase, but most of all because it was really surprising. The market consensus assumed its fall to 4,4% in January. R / R. He was to contribute to this, among others a strong drop in inflation in Germany caused by base effects (the effect of VAT returning to the normal rate has disappeared). There was a decline there and HICP inflation fell to 5,1%. from 5,7 percent in December, but it was much lower than forecast (4,7%). In other countries, however, inflation either increased or, similarly to Germany, fell less than expected.

January's inflation data changed the balance of power. They indicate that it will be a much bigger problem for the European Central Bank than previously assumed. Hence, expectations for earlier interest rate hikes are rising. The futures market is pricing in that the bank may raise rates by 10 basis points in July, while until recently the market expected the first rate hike only at the beginning of 2023. 

The Eurodollar reacts

The rise in expectations for earlier rate hikes directly translates into the strengthening of the euro against the dollar. This trend started on Monday, when inflation data from Germany and Spain appeared on the market, which were the first to suggest that there would be a problem with inflation. Today, the EUR / USD quoted above $ 1,13, plotting the morning star candlestick pattern earlier on the daily chart and returning above the November low. This balance of power suggests an attack on the 8-month bearish line (currently at 1,1380). And there is a high probability that this line  will soon be broken.

Daily chart EUR / USD. Source: Tickmill

It will play a decisive role in the success of the EUR / USD attack on the bearish line European Central Bank (ECB). Exactly, this is his reaction to record Euroland inflation. The key will not be the bank's decision on Thursday, because there should be no surprises here, but Christine Lagarde's comment on the inflation data.