EUR/USD dips back under 1.1300, now back below pre-NFP levels

• EUR/USD has dipped back under 1.1300 and is now below its pre-US jobs data levels from last Friday.
• Hawkish remarks from ECB’s Schnabel in wake of last Friday’s hot Eurozone inflation have been ignored.
• FX markets remain primarily focussed on incoming US data and the Fed right now.

EUR/USD has on Monday returned back to or even slightly below its pre-US labour market data levels where it traded last Friday and has in recent trade dipped under the 1.1300 handle. To recap, the latest US labour market report revealed a weaker than expected headline payroll gain in December but stronger than expected measures of economic slack and wage growth in December. In the wake of the report – and despite the near-unanimous interpretation by analysts that it endorses the emergent Fed stance that accelerated monetary tightening in 2022 is warranted – EUR/USD broke to the north of a short-term pennant structure and went as high as 1.1360 (from previously just above 1.1300).

Whilst technical buying and dollar-profit taking were attributed as behind the pair’s post-jobs data bounce, analysts at the time warned that the move went against recent fundamental developments. Indeed, last week’s sharp surge in US government bond yields as markets price in a more aggressive Fed tightening cycle (that includes quantitative tightening to commence this year) points to a stronger, not weaker dollar. EUR/USD trade on Monday now seems to be corroborating that view. Strategists are warning that the USD’s recovery against the euro may be set to continue this week amid an incoming chorus of Fedspeak which will likely back up the hawkishness of last week’s minutes, as well as December Consumer Price Inflation.

Ahead of the release of the CPI report on Wednesday – which is expected to show inflationary pressures continued to heat up at the end of 2022, pushing headline CPI above 7.0% YoY – a chorus of analysts have been bringing forward Fed tightening bets. The December labour market report “was consistent with the Fed's evolving view that the labour market is getting close to or is already at maximum employment with wage pressures building” analysts at NatWest Markets remarked. “This should add to speculation about a March hike, and we have pulled our expectation for the Fed's lift-off to occur in March instead of June,” analysts at the bank added, whilst Goldman Sachs announced that they now expect four 25bps rate hikes in 2022 versus their previous forecast for three. “The Fed is likely to feel the pressure from this early additional price pressure and feel compelled to start the hiking cycle even as soon as the March meeting,” said an analyst at RBC Capital Markets.

With the focus primarily on US data and the Fed this week, FX markets seem to be ignoring developments that increasingly point to an increasingly hawkish ECB. In the wake of last Friday’s hotter than expected Eurozone HICP inflation numbers, influential ECB governor Isabel Schnabel was on the wires over the weekend echoing some of the rhetoric that up until only very recently was only espoused by the central bank’s hawks. Schnabel said that rising energy prices may force the ECB to stop “looking through” elevated inflation and instead act to temper it, particularly if the green transition proves more inflationary than expected. Elsewhere, the EU Sentix Index for January was out on Monday and showed a surprise improvement, indicative of expectations amongst Eurozone investors that Omicron will not inflict lasting economic damage.