It's going to be a week for central banks, EUR/USD is back above 1.09

The EUR/USD exchange rate returned above USD 1,09, reacting to a surprising increase in inflation in Spain. The data reminded investors that the fight against inflation in Europe will require further interest rate hikes. This should set the mood in the FX market ahead of Wednesday-Thursday FED and ECB decisions, the most important events of the week on the markets.

Surprising inflation data from Spain

In January, consumer inflation (CPI) in Spain unexpectedly increased from 5,7% to 5,8% y/y, while the market expected it to drop below 5%. Core CPI inflation accelerated from 7% in December to 7,5% y/y. The data became an impulse for the increase EUR / USD quotations, which they returned above $1,09. Above all, however, they reminded investors that the road to controlling inflation in the euro zone is much more winding than in the US, hence it will require the ECB to tighten monetary policy more decisively than the American Fed will have to do in the coming months.

Daily chart EUR / USD. Source: Tickmill

In the coming days, investors may remind themselves of the need to raise interest rates in the Euroland several times. On Tuesday, there will be January inflation data from Germany (forecast: 9,2% y/y) and France (forecast: 6,1% y/y), and on Wednesday from Italy (forecast: 10,1% y/y) and the entire euro zone ( forecast: 9,0% y/y). It cannot be ruled out that also in these economies inflation in January will surprise negatively.

Monetary policy of the FED and ECB

However, the inflation data will be only a foretaste of emotions awaiting investors on Wednesday and Thursday, when the Fed and the ECB will decide on monetary policy. The market assumes that interest rates in the US will be increased by 25 basis points, and in the Euroland by 50 basis points. This should already be included in the price. What will be crucial, however, is what signals the two central banks will send. If the ECB remains strongly hawkish and the Fed tones down a bit, the EUR/USD rate may quickly soar above USD 1,10.

The results of the Fed and ECB meetings are the main event of the week. The inflation reports described above will only build the mood around the central banks' decisions. Other macroeconomic releases, and there will be a lot of them this week, should be ignored. For the record, it is worth knowing that in the coming days preliminary data on GDP dynamics in the fourth quarter of 2022 in France, Italy and the entire euro area, January PMI indices from Japan to the USA, or a series of data from the American labor market will be published, led by monthly reports on unemployment (forecast: 3,6%) and employment in the non-agricultural sector (forecast: +185) published on Friday.