Euro Area Inflation Figures Give the ECB Reasons to Stay Hawkish

It was a busy day start to the European session. Early in the session, manufacturing PMI numbers for Italy and Spain and finalized PMIs for France, Germany, and the Eurozone drew interest. However, euro area inflation garnered greater interest ahead of the ECB policy decision on Thursday.

Member State Manufacturing Sector PMIs

In December, Spain’s manufacturing PMI rose from 46.4 to 48.4, with Italy’s PMI up from 48.5 to 50.4. Economists had forecast PMIs of 48.0 and 49.6, respectively.

The French manufacturing PMI rose from 49.2 to 50.5, a downward revision from a prelim of 50.8. Germany’s PMI increased from 47.1 to 47.3, up from a prelim 47.0.

Eurozone PMI Reflects Modest Improvement in Manufacturing Sector Activity

For the Eurozone, the manufacturing PMI rose from 47.8 to 48.8, in line with a prelim 48.8. Following unexpected growth in Q4, the latest PMI numbers support the ECB forecast of a short-lived and shallow recession.

According to the January survey, France ranked at the top of the PMI table, with a 5-month high PMI of 50.5. Germany sat at the bottom despite a 4-month high of 47.3.

Across the euro area, input cost inflation eased while selling prices continued an upward trend.

Euro Area Inflation Softens but Remains Elevated

According to prelim figures, the Euro area annual inflation rate accelerated from 9.2% to 8.5% in January. Economists forecast an inflation rate of 9.0%.

According to Eurostat,

• Energy is expected to have the highest contribution with an annual rate of 17.2% (December: 25.5%), followed by food, alcohol, & tobacco at 14.1% (December: 13.8%).
• Non-energy industrial goods inflation is expected to accelerate from 6.4% to 6.9%, while services is expected to fall from 4.4% to 4.2%.

EUR/USD Price Action in Response to Inflation

Ahead of the euro area inflation numbers, the EUR/USD fell to an early low of $1.08522 before rising to a pre-PMI high of $1.08839.

In response to the PMI numbers, the EUR/USD hit a high of $1.08886. However, the euro area inflation report sent the EUR/USD to a session high of $1.08888 before easing back.

At the time of writing, the EUR/USD was up 0.20% to $1.08852.

Next Up

It is also a busy day on the US economic calendar. ADP nonfarm employment change will draw interest ahead of ISM Manufacturing PMI and JOLTs job opening numbers. We expect the labor market numbers to have the most influence.

However, the all-important Fed interest rate decision and the Fed Chair Powell press conference will have the final say.

A 25-basis point Fed rate hike would leave Fed Chair Powell to decide the fate of the dollar and market risk sentiment. A hawkish policy outlook, citing elevated inflation, tight labor market conditions, and a resilient US economy, could spook the markets.