EUR/USD hovers around mid-1.1400s as ECB v/s Fed battle intensifies post US inflation

EUR/USD hangs in balance around the highest levels since mid-November during the early Thursday morning in Europe.

The major currency pair jumped the most in five weeks the previous day as the US dollar slumped to a multi-day low as the inflation data matched forecasts, triggering market challenges that the Fed hawks will have less ammunition when they meet on January 25-26.

That said, the US Consumer Price Index (CPI) jumped to the highest levels since 1982 while matching 7.0% YoY forecasts, up from 6.8% previous readouts. The monthly figures rose to 0.5% versus 0.4% expected but softened below 0.8% prior.

However, the Fed policymakers reiterated their bullish bias following the inflation data release, which in turn has been challenging EUR/USD bulls of late. Federal Reserve Bank of St. Louis President James Bullard was the first among them who said, per Wall Street Journal (WSJ), “Four rate hikes in 2022 now appear to be on the table and, in the face of high inflation, a rate hike in March seems likely.”

Following that, a member of the Fed Board of Governors and incoming Vice Chairman of the FOMC Lael Brainard also mentioned, “Inflation control is Fed's most important task,” whereas President and CEO of the Federal Reserve Bank of San Francisco Mary Daly signaled a rate hike as early as March.

On the other hand, European Central Bank (ECB) policymaker Francois Villeroy de Galhau said, “We are very near to the peak in inflation.” It’s worth noting that the Eurozone Industrial Production jumped 2.3% MoM in November versus 0.5% forecasts and -1.3% revised prior.

Given the recently escalating pressure on the Fed policymakers, the bond yields are consolidating the previous losses, which in turn challenge the equity futures and riskier assets. However, a slew of policymakers from the European Central Bank (ECB) and the Fed are up for speaking on Thursday, which in turn will offer an active day for the EUR/USD traders. In addition to the monetary policy signals, the US Producer Price Index (PPI) for December and weekly jobless claims, as well as European Economic Bulletin, will also direct short-term pair moves.

To sum up, the recent inflation data solidifies the ECB v/s Fed drama even as the Fed has an upper hand over the bloc’s central bank. As a result, the EUR/USD prices may witness a pullback should the balance tilt in favor of the Fed hawks.

Technical analysis

A clear upside break of a descending trend line from May, around 1.1410 by the press time, joins bullish MACD signals to direct buyers towards the 100-DMA level of 1.1510.