US bond yields bonds remained around 1.80% after the Fed said it would soon end the bond-buying process and raise rates.
Everything will depend on the inflation figures scheduled for publishing as early as next week, and to a certain extent, on the wage component - average hourly earnings – due to be released this Friday.
In Europe, the situation is different, with an unemployment rate at 7%, well above the US rate, and core inflation of 2.5% that only slightly exceeds ECB’s inflation target of 2%.
However, markets have been betting that the European Central Bank will raise interest rates three times this year by 10 basis points for just a few days now.
This has pushed the German BUND bond yield to positive levels, 0.03%, for the first time since March 2019.
And all this, although the ECB president Christine Lagarde recently stated that a rate hike in 2022 seems "highly unlikely." That's what she said last month, but since then, strong fourth-quarter economic readings were released, including German annual inflation on Monday at 4.9%, showing that price growth in the euro area is likely to exceed the ECB's median forecast of 3.2% for this year. This is causing countries like Germany and others around it, traditionally sensitive to inflation, to publicly show their concern and press for a change in European monetary policy.
With ECB rate hike bets and Fed rate hikes already partially priced in for 2022, the euro rebounded from 19-month lows against the dollar, gaining more than 130 pips in the last two trading days.
Tomorrow's ECB meeting will be decisive in this regard. Everyone will be watching Lagarde's statements in case she gives any signal that points to potential interest rate hikes. But at the moment, it seems very unlikely; the pressure exerted by the process already initiated by the Fed is evident. Still, the situation in Europe differs greatly from that of the United States, and a change towards a more restrictive monetary policy could put some European countries in serious difficulties.
Meanwhile, the EUR/USD corrected sharply and traded around the 200 hourly SMA approaching the 1.1300 reversal level.
At the moment, it can be considered just a simple technical correction, with most market participants forecasting the pair will continue trading in lower areas around 1.1000.
Sources: Bloomberg, Reuters.
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