Author: Amar – Technical Analyst

Economist predicted that January’s inflation will be higher but show moderation in underlying momentum. We see headline inflation print at 7.4% while core inflation prints at 5.9%, which could translate into a small selloff in bonds, wobbly equities and a supported dollar. This is because changes to CPI basket weights were updated 8 February and show an increase in the weights of used cars and shelter costs and hence towards the prices that are rising the most and, in turn, skewing the risk to the upside and underscoring the larger uncertainty for today’s release.

Euro-area inflation will ease below the European Central Bank’s 2% target next year, according to new draft projections from the European Union that will feed the growing debate about how quickly to raise interest rates. The forecasts see the inflation rate peaking at 4.8% this quarter, staying above 3% until the third quarter and declining to 2.1% in the final three months of 2022. It’s predicted to be below the ECB’s 2% target for all of 2023. The situation has prompted a hawkish pivot from the ECB, which is no longer ruling out rate hikes this year. Governing Council members Joachim Nagel and Klaas Knot have both said in recent days that such a move is possible.

The recent selloff in short-term EUR bonds has sent the dollar in a smaller retreat. In the short-term a higher print could frontload Fed hikes and support the dollar makes it wobbly equities will have the same impact but in the medium-term, considerable USD gains will probably require a higher Fed terminal rates pricing as the forex market has moved ahead of the rate market and the Fed.