Published on 20.01.2023 14:13

The Euro has been a mixed bag this week after conflicting reports about the number and size of further interest rate hikes as the year 2023c unfolds but that may have all been put to rest yesterday after comments by various ECB officials

ECB Governing Council and Dutch central bank chief Klaas Knot said on Thursday said investors underpricing ECB rate hikes and that "multiple" 50 basis point hikes were likely required to bring down inflation which is currently running at record levels.

"The sort of market developments that I've seen over the last two weeks or so, are not entirely welcome. I don't think that they are compatible with a timely return of inflation towards 2%," Knott said.

Also on Thursday, ECB President Christine Lagarde said the central bank was determined to "stay the course" which investors interpreted as larger rate hikes to reign in inflation. Mrs Lagarde also warned market participants to be careful about factoring in lower rate hikes in the Eurozone when considering their financial position.

"I would invite [financial markets] to revise their position; they would be well advised to do so," Lagarde said in Davos at the World Economic forum.

The developments come amidst fears Eurozone financial conditions have eased too much of late and investors began price in a 50 basis point hike in February which could then slow down to a 25 basis move in March, thereby undermining the central bank's attempts to bring inflation under control.

"Looking at financing conditions, many measures have eased again early this year after tightening after the ECB’s December meeting. If the ECB does not think inflation risks have fallen at the same time, such developments only add pressure on the central bank to tighten policy further," explains Jan von Gerich, Chief Analyst at Nordea Markets.

Looking further ahead today, the main drivers of the EUR/USD currency pair will be the release of the producer price index from Germany which is a key indicator of business confidence as well as a monetary speech from ECB president Christine Lagarde where the question of rate hikes will be on the agenda.

Later in the American session the latest existing home sales figures will hit the market as well as a monetary speech by Federal reserve board member Christopher Waller which may create some trading opportunities to close out the week.


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