Schnabel strengthens the euro, focusing on US inflation

The day before the publication of the US inflation report, American indices were rising. He did his best yesterday Nasdaq Composite gaining 0,75%, the S&P500 grew by nearly 0,6%. and the industrial Dow Jones recorded a positive result of 0,45%. The EUR/USD rate increased to around 1,0970 after the words of Isabela Schnabel from the ECB. Yields on German government bonds also increased.

But is it too early to cut interest rates?

Yesterday's increases in the main currency pair could have resulted from a stronger euro, as Isabel Schnabel, a member of the Management Board, spoke about monetary policy European Central Bank. Her words were perceived quite hawkishly. She stated that it was too early to discuss interest rate cuts. She clearly declared that the ECB will maintain their high level until it is certain that inflation will permanently return to the 2% target. She emphasized relevance of future macro data, which will illustrate the development of the situation in this matter. The board member also emphasized that "financial conditions have relaxed more than expected", explaining that this relaxation is related to expected interest rate cuts.

Let us recall that the ECB kept interest rates unchanged at the last two meetings, assessing the impact of its campaign of tightening monetary policy on the economy.

The market valuation has changed slightly. The probability of a reduction in the cost of money in the euro zone at the March meeting has decreased to a level close to 30%. On Friday it was still 50 percent.

Inflation is slowly falling

Today we will learn inflation data in the US in December. Economists polled by Bloomberg expect that the basic indicator will increase more strongly month by month compared to November (up to 0,2%), and the change in the base rate in the same approach will show at least a dynamics of 0,3%. Year to year, the base rate is expected to decrease from 4%. up to 3,8 percent and the main one to increase to 3,2 percent. with 3,1 percent previously.

It is now much clearer around the world that inflation is slowly falling. Today's data should not change much. Until CPI the base stabilizes between 0,2 and 0,3 percent. m/m institutions will not announce that they have won the fight against this economic phenomenon.

Yesterday, the EUR/USD rate reached local maximums and this morning it approached the peak set last Friday after the publication of the NFP report. The arrangement of candles on the chart suggests that perhaps another upward impulse is beginning on the main currency pair. Last Friday's low was located within two internal Fibo retracements (38,2 and 61,8%) and also close to the lower band of the growth channel. There is a noticeable similarity in terms of the size of the last two downward corrections. Theoretically, lower-than-expected CPI data from the US should further weaken the US dollar and thus cause EUR/USD to break the level of 1,10.

Source: Łukasz Zembik, OANDA TMS Brokers