03.01.202315:10 Forex Analysis & Reviews: EUR/USD: ECB needs to take further action to contain inflation expectations

Today's European trading session began with a sharp strengthening of the dollar, including against the euro. Perhaps this is how market participants, who follow euro quotes, reacted to yesterday's publication of European macro data, which turned out to be rather weak (yesterday, major world exchanges did not work, and there was low activity of traders and low trading volumes on the market).

The S&P Global manufacturing PMI for December came out at 47.1 against the forecast and the previous value of 47.4.

The manufacturing PMI for the entire euro area remained at around 47.8. The indices are also below the value of 50, which separates the growth of activity from its slowdown.

It is also possible that on the first trading day of the new year, market participants are trying to protect themselves from the risks related to the rising coronavirus infections in China, high inflation, geopolitical tensions, and the threat of a global recession, seeking refuge in a protective dollar.

Thus, the EUR/USD pair lost 1.2% in the first hours of today's European session, falling by 130 points to the opening price of today's trading day. As of writing, EUR/USD is trading near 1.0544, very close to the strong support at 1.0525. Considering such a sharp drop, literally in a couple of hours, as well as reaching a zone of strong support, from a technical point of view, near the current levels, we can assume consolidation with a subsequent rebound, given the general upward trend of the pair.

European Central Bank Governing Council member Joachim Nagel said yesterday that the ECB needs to take further action to contain inflationary expectations, i.e., continue to tighten their monetary policy.

As for today's economic calendar, the preliminary harmonised consumer prices (HICP) for Germany will be released at 13:00 (GMT). The index (CPI) is published by the EU Statistics Office. It is an indicator for inflation and is used by the Governing Council of the ECB to assess the level of price stability. In normal economic conditions, rising prices force the country's central bank to raise interest rates to avoid excessive inflation (higher than the target set by the central bank). Therefore a rise in the index is positive for the national currency (under normal circumstances), and a decrease in the index (expected to 10.7% from 11.3% in November) is negative.

At the beginning of the U.S. trading session, the updated PMI for the U.S. manufacturing sector (from S&P Global) will be released. Previous values were 47.7, 50.4, 52.0, 51.5, 52.2, 57.0, 59.2. The forecast for December is 46.2 (the preliminary estimate was 46.2), indicating a continued slowdown in this sector of the U.S. economy, which is a negative factor for the dollar.