EU CPI blows away estimates. Will it affect ECB decision?

The January flash reading of the Eurozone CPI was much higher than anticipated.  The headline print was 5.1% YoY vs 4.4% YoY expected, and 5% YoY last.  The main culprit for the higher than expected reading was energy costs, which soared 28.6%!  The headline inflation rate remains well above the ECB’s target of 2%.  Core CPI for January was 2.3% YoY vs 1.9% YoY expected and 2.6% YoY in December.  The core reading excludes volatile components of the headline CPI, including energy, food, alcohol, and tobacco.

Recall that Christine Lagarde and other members of the ECB haven’t been too concerned about inflation.  The minutes from the last ECB meeting referred to the recent and projected near-term inflation as “temporary”.  Christine Lagarde recently went on to say that the ECB has “every reason not to react as quickly” as the Fed.  Several other members of the committee echoed these sentiments.  The ECB meets tomorrow, and no changes are expected.  At the December meeting, the Committee decided to let the Pandemic Emergency Purchase Program (PEPP) expire as planned in March, however it would continue buying bonds through Q3 under the Asset Purchase Program (APP).  Will the high CPI reading cause the ECB to be slightly less dovish?  See our complete ECB Preview here.

On a 15-minute timeframe, EUR/USD sprinted higher after the release of the CPI beat from 1.1293 to resistance near-term resistance at 1.1335.  Profit taking ensued, bringing price back to pre-CPI levels.  One must consider if traders were taking profits ahead of tomorrow’s ECB meeting.

Source: Tradingview, Stone X

On a daily timeframe, EUR/USD spiked through the 50 Day Moving Average at 1.1308 and was headed toward the 61.8% Fibonacci retracement from the highs of January 14^th to the lows of January 28^th, near 1.1344, before sells entered the market.  If price breaks there, the top trendline of the downward sloping channel comes into play near 1.1366, then horizontal resistance near 1.1376.  Above, price can run all the way to the January 14^th highs near 1.1482.  Support is at yesterday’s low of 1.1220 then horizontal lows of 1.1186.  Below there is the January 28^th low at 1.1121, then the 127.2% Fibonacci extension from the low of November 24^th, 2021 to the January 14^th highs at 1.1105.

Source: Tradingview, Stone X

EU CPI came in much higher than expected for January.  The ECB meets tomorrow.  Given how dovish the ECB was in December and considering that energy was the main driver of the inflation increase,  Christine Lagarde and gang are likely to stick with the theme that inflation in temporary.