EUR/USD climbed to a fresh weekly high of 1.1331 on Wednesday before going into a consolidation phase around 1.1300 early Thursday. Divergence in central bank policy should limit EUR rebounds though further position adjustment could develop around European Central Bank (ECB’s) meeting before EUR/USD downtrend resumes, economists at Westpac report.

Higher than expected January CPI gives ECB something to talk about

“The divergence in rhetoric between an increasingly hawkish Fed into 2022 and ECB maintaining QE through 2022 drove the EUR/USD slide in late January. Initial EUR rebounds seemed to be position squeezes, but they also occurred as national Jan CPI releases showed more persistent upside pressure culminating in Eurozone headline CPI rising to 5.1% YoY, countering ECB’s projections of declines developing through 2022. Lively debate may develop at ECB’s policy meeting on 3rd Feb, but their March meeting remains more critical for any altering of their accommodation.” 

“Rejections of levels below 1.1200 put EUR/USD back in the tight range of late 2021. Though EUR might retest mid-Jan’s spike to 1.1480 on more position adjustment, any slip back below 1.1200 should reinstate the still compelling yield differential in favour of USD strength.”

See – ECB Preview: Forecasts from 12 major banks, under pressure to explain its stance on inflation