Euro Rebounds as Inflation Climbs

The euro has rebounded in the Tuesday session. In North American trade, EUR/USD is trading at 1.1365, up 065% on the day.

Eurozone inflation hits record high

Eurozone inflation surged to a new high in November. On an annualized basis, inflation is projected to have climbed to 4.9%, up from 4.1% in October and higher than expected. Core CPI showed a similar trend, rising from 2.0% in October to 2.3% in November. Energy prices, which jumped 27%, were the key driver of the rise in inflation.

The headline reading is more than double the ECB’s inflation target of 2 per cent, which raises further doubts in the narrative championed by ECB President Christine Lagarde that high inflation is being driven by temporary factors and will ease in the coming months. Some ECB Governing Council members have expressed concern as inflation continues to accelerate, and this should make for an interesting policy meeting on December 16^th. The bank will likely upwardly revise its inflation projections at the meeting, and policy makers may signal their plans for the emergency pandemic program (PEPP). Unlike the BoE and the Fed, the ECB appears far away from any rate moves, but may provide some signals at the meeting about scaling back QE.

The Omicron variant of Covid-19 has caused plenty of volatility on global financial markets, and investors are looking to Fed Chair Jerome Powell for some insights. Powell will speak before US senators later in the day, and his prepared testimony stated that Omicron could hurt the US employment market and exacerbate supply chain disruptions. Powell reiterated that he expects inflation to ease sometime in 2022, but admitted that inflation will remain well above the Fed’s target of 2 per cent. With inflation current galloping at a worrying clip of 6 per cent, Powell may find that lawmakers are skeptical about his assurances that inflation is transitory.

 EUR/USD Technical

• EUR/USD has support at 1.1229. This is followed by support at 1.1135
• EUR/USD is putting strong pressure on 1.1373. Above, there is resistance at 1.1423