Post date: 07/02/2022 11:54

We have been warning that the ECB’s plans to wait until 2023 before hiking rates were a pipedream in a world of rising inflationary pressures, and our view was fully vindicated last week. The massive upwards surprise in the Eurozone January inflation set the stage for Lagarde’s hawkish pivot. Understandably, the common currency soared immediately after the news. A modest dollar rally the next day erased some of the greenback losses on the back of a strong US payrolls report, but the dollar still ended the week at the bottom of the G10 rankings. The euro rose sharply against every major currency, save the Swedish krona. Traders’ focus will keep shifting back and forth between central bank announcements and inflation data, the factors that will dominate currency markets for the foreseeable future. This week, all eyes are on the US inflation report for January on Thursday, with yet another increase to multi-decade records pencilled in by forecasters. Speeches by ECB officials will also be in focus, which could provide further fuel to the euro rally as the hawkish shift from last week’s meeting is confirmed.


The Bank of England also had hawkish surprises for the market, though these were somewhat overshadowed by the ECB ones immediately following. Rates went up 25 basis points as expected, but a strong minority almost forced the first 50 bp hike since 2004, losing the vote 5-4. Sterling rose against the US dollar but had trouble holding its own against the ECB hawkish shift and the massive euro rally. The focus on central bank policy will continue this week, with speeches by Bank of England Chief Economist Pill (Wednesday) and Governor Bailey (Thursday). Overall, the prospects for aggressive hikes and a still cheap valuation bode well for the pound over 2022.


The Eurozone had one of its most momentous weeks in many months. It started with a massive upward surprise in inflation and ended with a 180-degree pivot on the topic by President Lagarde at the February meeting of the ECB. Not only are assets purchases to be wrapped up earlier than expected, Lagarde also completely abandoned her pledge to wait until 2023 before lifting rates. The Council is now “unanimously” concerned with inflation and sees “upside risks” in its future path. While euro rates had a massive upward move in response, we think that there is still room to go here and are unsure the ECB can wait until September before raising rates. The euro should continue to remain well supported as markets adapt to the ECB turnabout on policy.


Unusually for a labour report week, the US dollar found itself mostly driven by events across the Atlantic. However, the payrolls report itself appeared very strong in spite of the omicron distortions, with strong job creation, upward revisions to previous months’ data, and wages rising, though not enough to keep up with prices, for now. It is clear the US is essentially at full employment and Federal Reserve hikes are the only tool available to try and keep pressure off prices. It is, however, worth noting that monetary policy acts with “long and variable” lags, and we therefore think that rates have quite a long way to go before their impact on prices is felt.