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Euro drops even as Eurozone inflation surprises to the upside

Home >  Daily Market Digest >  Euro drops even as Eurozone inflation surprises to the upside


Written by:
Myrsini Giannouli

03 March 2023
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Important calendar events

  • JPY: Tokyo Core CPI, Unemployment Rate
  • EUR: German Trade Balance, French Industrial Production, French, German, Spanish, Italian, and EU Final Services PMI, PPI
  • GBP: Final Services PMI
  • USD: Final Services PMI, ISM Services PMI, Fed Monetary Policy Report


The dollar gained strength on Thursday, supported by robust US labor data, and the dollar index climbed to 105.1. US Treasury yields also gained strength, with the US 10-year bond yield rising above 4.08%. 

US jobs data came in strong on Thursday, boosting the dollar. Unemployment Claims this week fell to 190K from 192K last week, against expectations of an increase to 196K. Revised Unit Labour Costs rose by 3.2% for the final quarter of 2022, versus the 1.6% predicted. 

Fed rhetoric remains hawkish, providing support for the dollar. FOMC member Kashkari stated on Wednesday that although a 25-bp rate hike was likely at the next policy meeting, a 50-bp increase was not off the table. 

Minutes of the latest Fed meeting indicate that FOMC members believe that there is still more work to be done to tackle inflation. Even though FOMC members were in favor of reducing the pace of rate hikes, a pause in the central bank’s tightening policy does not seem to be on the cards just yet.

The Federal Reserve raised interest rates by only 25 basis points at its February meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. Rate hikes have become less aggressive and may continue at their current pace, but the Fed might raise interest rates for longer than previously expected. This means that there are likely still a couple of rate hikes up ahead, which may provide support for the dollar. Current market odds lean towards further tightening in the upcoming Fed meetings and an increase in interest rates up to 5.25%.

US inflation data last week showed that price pressures in the US remain high and are not easing at the pace anticipated. Core PCE, which is the Fed’s primary inflation gauge, came in hotter than expected, rising by 0.6% in January against predictions of a 0.4% raise. 

US headline inflation in January dropped to 6.4% year-on-year versus the 6.2% expected. PPI data also surprised markets to the upside, rising by 0.7% in January against expectations of a 0.4% raise and a 0.2% drop in December. Recent US inflation data highlight the risk of inflation becoming entrenched. Sticky inflation may induce the Fed to rethink its recent dovish pivot.

Preliminary GDP for the final quarter of 2022 was disappointing, showing that the US economy expanded by 2.7% against expectations of a 2.9% growth. 

Several economic activities and health indicators are scheduled to be released on Friday and may affect dollar prices. The most important of these are the ISM Services PMI data, which coming after Wednesday’s manufacturing data, will provide information on the economic outlook of the US.



The Euro went down on Thursday, despite hotter-than-expected Eurozone inflation and hawkish ECB rhetoric. EUR/USD was volatile on Thursday, dropping to 1.058. If the currency pair goes up, it may encounter resistance near 1.070. If the EUR/USD pair declines, it may find support at 1.053. 

EU inflation data on Thursday showed that price pressures in the Eurozone remain high. Flash CPI Estimates showed that headline inflation in the Eurozone eased to 8.5% annually in February from 8.65 in January. Markets were predicting that inflation would cool to 8.2%. Even though February’s inflation print was higher than expected, the Euro dropped on Thursday, as national readings in recent days pointed to an even higher print. Core CPI, which excludes food and energy, went up by 0.8% in February and core inflation hit a record high of 5.6% year-on-year.

Sticky price pressures in the Eurozone are likely to affect ECB policy, forcing the EU Central Bank to continue raising interest rates. ECB President Christine Lagarde emphasized on Thursday that inflation is not showing signs of a stable decline and stated that the ECB would continue to hike rates to rein in persistent price pressures in the Eurozone.

German Buba President Nagel delivered a hawkish speech on Wednesday, boosting the Euro. Nagel stated that inflation in the Eurozone remains persistent, stressing that further rate hikes should be expected beyond March. 

EU Economic Forecasts indicate that the EU economic outlook appears to be improving, with an upgraded growth forecast for 2023. The EC lifted their growth outlook for 2023 to 0.9%, indicating that the Eurozone will narrowly avoid entering recession and the economy is slowly expanding. Inflation expectations were also downgraded, with headline inflation now expected to fall to 5.6% in 2023. Flash EU GDP data for the final quarter of 2022 confirmed the EC’s forecast, showing that the Eurozone economy expanded by 0.1%. 

The ECB raised interest rates by another 50 bp at its February meeting, bringing its main refinancing rate to 3.0%. ECB President Christine Lagarde has emphasized that the central bank aims to bring inflation down to its 2% target. Lagarde confirmed that another 50-bp rate hike would follow at the next monetary policy meeting in March, after which the ECB would re-evaluate its policy. Market odds are currently favoring an increase of the ECB refinancing rate to 4.0% by June.

Eurozone Final Services PMI data will be released on Friday and, together with Wednesday’s Manufacturing PMI data will yield a composite index for the two most important economic sectors.  

EURUSD 1hr chart



The Sterling dipped against the dollar on Thursday, with GBP/USD dropping to 1.193. If the GBP/USD rate goes up, it may encounter resistance near 1.214, while support may be near 1.192. 

European Commission President Ursula von der Leyen met with Prime Minister Rishi Sunak earlier in the week and managed to strike a new Brexit deal. The newest version of the Northern Ireland Protocol, known as the Windsor Framework, contains more favorable trading conditions for the UK, boosting the Sterling. 

BOE Governor Andrew Bailey delivered a speech on Wednesday that markets perceived as dovish, driving the Sterling down. Bailey’s stance was cautious and non-committal, stating that nothing has been decided as yet regarding BOE’s future policy. Bailey refused to commit to further rate hikes but did not rule out the possibility that further rate increases might be necessary.

BOE members continue to be divided on the central bank’s future policy direction and market expectations on the outcome of the next policy meeting fluctuate. The BOE raised interest rates by 50 bp at its February meeting, bringing the official bank rate to 4.0%. Markets are currently pricing in a 25-bp rate at the next BOE policy meeting. Several market participants though believe that the British central bank will pause rate hikes completely. 

UK headline inflation cooled at a higher pace than anticipated, dropping to 10.1% year-on-year in January from 10.5% in December. Cooling inflation rates remove some of the pressure on the BOE to continue its economic tightening. 

Recent GDP data showed that the British economy is slowing down. The British economy contracted by 0.5% in December, which was more pessimistic than the 0.3% expected. Preliminary GDP for the final quarter of 2022 showed stagnation, while GDP for 2022 came in at 4.1%. The IMF downgraded the UK’s growth forecast, predicting that the British economy will contract by 0.6% this year, which is also consistent with BOE forecasts.

The UK’s grim economic outlook limits policymakers’ ability to increase interest rates sufficiently to rein in inflation. The British economy is struggling, and policymakers will have to assess how much tightening it can withstand to bring inflation down.

UK Final Services PMI data are due on Friday and will show the direction of the sector in February. Together with Wednesday’s Manufacturing PMI data, they will provide a clearer picture of the economic activity outlook in the UK.

GBPUSD 1hr chart



USD/JPY climbed above the 137 level on Thursday, as the dollar gained strength. The Yen was supported by optimistic economic data for Japan on Thursday, but not sufficiently to outpace the dollar. If the USD/JPY pair declines, it may find support near 134. If the pair climbs, it may find resistance at 138.2. 

Capital spending for the final quarter of 2022 increased by 7.7% versus the 7.2% expected. Monetary Base contracted by 1.6% on an annual basis in February, which was still more optimistic than the 3.2% predicted. Consumer confidence, on the other hand, fell short of expectations, with a 31.1 point in January against expectations of 32.1. 

The Yen has been exhibiting high volatility over the past couple of weeks as developments on the succession of the BOJ Governor are front and center in the news. Incumbent BOJ Governor Kuroda is a staunch supporter of an ultra-loose monetary policy and his term in office expires in April. Japanese Prime Minister Fumio Kishida nominated former BOJ member Kazuo Ueda for the post of BOJ governor last week. Ueda is an academic economist, and his stance is seen as more pragmatic rather than ultra-dovish. 

Most market analysts consider that Ueda will likely not be in a hurry to unwind the BOJ’s ultra-easy policy, but as yet his intentions remain unclear. Ueda appeared before the Japanese government's lower house known as the Diet on Friday and again on Monday. Markets eagerly awaited his testimony for signs of a pivot in BOJ policy but as yet Ueda remains non-committal. Upcoming BOJ Governor Ueda hinted at the possibility of tweaking the central bank’s bond yield curve control in the future. However, he cautioned against sudden changes in monetary policy.

BOJ Deputy Governor Shinichi Uchida also reinforced the notion that drastic policy changes should be expected for a while. Uchida defended the central bank’s monetary policy stance and stated that the BOJ must maintain monetary easing. Market expectations of a departure from ‘Abenomics’ have been disappointing, driving the Yen down.

Japanese policymakers maintained ultra-low interest rates at the BOJ’s January meeting, keeping the central bank’s refinancing rate at -0.10%. Preliminary GDP data for the final quarter of 2022 showed a minimal economic expansion of 0.2%. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy.

Headline inflation in Japan has gone above the BOJ’s 2% target, touching 40-year highs and putting pressure on businesses and households. Increased price pressures and wages, raise concerns of a wage-price spiral and may force the BOJ to pivot towards a more hawkish policy.

Volatility in Yen price is expected this week due to developments regarding the imminent change in BOJ leadership especially following Ueda’s highly-anticipated testimony before the Diet on Monday. Tokyo Core CPI data on Friday may provide information on price pressures in Japan and may cause some volatility in Yen price.

USDJPY 1hr chart


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Written by:
Myrsini Giannouli

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