The euro is flat on Wednesday, putting the brakes on a nasty four-day slide. EUR/USD dipped below the 1.09 line in the Asian session before recovering.
ECB’s Panetta warns about stagflation
Inflation has been skyrocketing in the US and UK, giving the Fed and BoE plenty of sleepless nights. I’m not sure if ECB President Lagarde is overly distraught about inflation, as she has repeatedly dismissed inflationary pressures as being transient. Just to refresh the readers’ memories, Fed Chair Powell sang the transient tune for months before famously “retiring” this stance as inflation kept on steaming ahead. Lagarde has insisted that the ECB will not tighten its policy, even though it will be out of sync with the Federal Reserve, which has embarked on a rate-tightening cycle.
ECB member Fabio Panetta weighed into the discussion over tightening on Tuesday. Panetta warned against raising rates, saying that eurozone growth could contract this year, and higher rates to combat inflation could damage the economy. With eurozone inflation at a record-high 7.5%, there have been calls from some ECB members to raise rates in order to curb inflation, but Panetta’s argument touched on the concern that with a very real risk of stagflation, raising rates could do more harm than good.
Fed President Lael Brainard made some hawkish comments on Tuesday, which sent US yields higher and extended the euro’s downswing. Brainard said that the Fed could start lowering its balance sheet, known as quantitative tightening, as early as April. Brainard also said that the Fed was prepared to take “strong action” to combat high inflation. Brainard’s comments were noteworthy in that Brainard is considered one of the most dovish FOMC members. The Fed is clearly in hawkish mode, and Esther George, another Fed president, said that 50-basis point hikes would be an option that the Fed would “have to consider”.
- EUR/USD is testing resistance at 1.0936. Above, there is resistance at 1.1060
- There are support levels at 1.0820 and 1.0696
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