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EUR/USD craters to 16-month lows after dovish Lagarde comments

Traders sold the euro Friday as Lagarde reiterated her dovish stance and new lockdowns are reimposed in many EU countries.

The euro fell one percent against the dollar, dropping below 1.1270 for the first time since July 2020 as the shared currency will likely have the worst inflation problems out of the major currencies.

Inflation to stay and not temporary

Earlier in the session, data showed that German PPI inflation rocketed to 18.4% year-over-year, up from 14.2% previously . Moreover, the monthly change rose to 3.8% from 2.3% in September.

Additionally, the French unemployment rate worsened to 8.1% from 8.0% previously, against expectations of improvement to 7.8%.

Traders paid attention to the ECB’s head Cristine Lagarde speech, who once again **reiterated that the conditions to raise rates are very unlikely to be satisfied next year **(despite nearly 20% PPI inflation in Germany).

Moreover, even after the expected end of the pandemic emergency, it will still be necessary for monetary policy – including the appropriate calibration of asset purchases – to support the recovery and the sustainable return of inflation.

Inflation drivers are to fade over the medium term. As positive demand forces gain strength, the inflation outlook will be better than before the pandemic. (yes, that is very appealing for people, to pay 20% or more for everything, job well done).

Therefore, the ECB remains the most dovish out of the major central banks, undermining the euro across the board.

New round of lockdowns

From other news, Austria reimposed a complete lockdown for both vaccinated and unvaccinated people for at least ten days (we have heard that before). Germany may follow. Also, starting From February 1st, everyone will be legally required to have been vaccinated. Austrian authorities also said they would make the COVID-19 vaccine mandatory, vowing β€œpenalties” for those who continue to resist.

It looks like another round of lockdowns is due in Europe for the third or fourth time this year. Sentiment notably worsened after this news, and stocks declined to session lows, undermining the euro further.

Technically speaking, the euro will probably retest June 2020 lows at around 1.1170, with the next bearish target at the psychological level of 1.10.

Alternatively, the single currency needs to climb above 1.14 to cancel the immediate bearish threat. Until then, rallies are expected to be sold, and bears remain in control.

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