LiveWire

The euro is losing some strength against the US dollar just ahead of the European Central Bank meeting. Early in the week, following a report indicating that the Euro Zone is planning to jointly issue bonds and news that the conflict may last less than expected, the European currency had a strong rebound. Though this morning the euro (-0.35%) is returning to the threshold of 1.10 dollars. Traders are wondering how the monetary institute will react to Russia's invasion of Ukraine and its economic consequences. President Christine Lagarde will have a difficult job finding the words to explain that the central bank wants to remain flexible while reassuring the market that it is taking rising inflation risks seriously. 

Recently the dollar gauge is losing momentum. While conventional logic suggests rising yields should buoy the greenback, there're signs of waning interest for the dollar. Leveraged funds, that reflect traders' speculative bets on USD is starting to roll over, CFTC data show. Demand for dollar call-options has also plummeted to the lowest in nine months. Additionally, the recent shift in the ECB's rhetoric is also adding pressure on the greenback, with traders pricing in 25 basis point hike as early as September, fueling demand for the euro.

ECB President on Friday suggested Eurozone inflation is transitory and most likely peaked after November’s reading of 4.9%, well above the 2% target set by the ECB. According to Lagarde, 55-60% of recent inflation came from rising energy prices, which should decline by the end of 2022 (excluding energy, inflation reads 2.5%). Lagarde also noted the ECB had more tools available to continue to provide favorable conditions, after the expected end of asset purchases in March 2022. The comments imply that the ECB could remain very accommodative for longer than previously anticipated and could in turn continue to pressure the EUR.

The European Central Bank last raised rates in July 2011 - it raised two times from 0.25% to 0.75% then cut it down to zero months later. It has been ZIRP and NIRP ever since.

Taper: "Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the PEPP than in the previous two quarters"