EUR/USD jumps above 1.10 after hawkish comments – will it hold?

Another day was another weakness in the US dollar as investors bought the euro amid some hawkish ECB chatter, again sending the most traded currency pair above the critical 1.10 threshold.

German economy is still not ok

In April, the headline number for Germany’s IFO Business Climate Index increased to 93.6 from March’s 93.2. The market had forecast a value of 94; thus, this was a minor miss.

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The IFO Expectations Index, which shows companies’ expectations for the next six months, increased to 92.2 from 91, above analysts’ forecast of 91.6. However, the Current Economic Assessment decreased to 95 from 95.4.

Economist Klaus Wohlrabe from the German Institute for Economic Research (IFO) commented on the survey’s release, saying that the German economy is far from a substantial upswing and the situation in the construction industry has not been worse since December 2015, with many cancellations.

Room for more hikes in EU

Pierre Wunsch, an ECB Governing Council member, told the Financial Times (FT) on Monday that the ECB will keep hiking interest rates until wage growth slows.

“We are waiting for wage growth and core inflation to go down, along with headline inflation, before we can arrive at the point where we can pause. So I would not be surprised if we had to go to 4% eventually.” Wunsch said.

This backs with ECB President Christine Lagarde’s statement that the ECB has “some way to go” before it is done raising interest rates.

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The European Central Bank will issue its policy decision next week, and the market anticipates a rate rise of at least 25 basis points (bps). This week, we should see data on inflation and growth in the Eurozone.

US data in focus this week

The first estimate of GDP for the first quarter will be released by the Bureau of Economic Analysis (BEA) on Thursday. Seasonally adjusted annual growth of the United States economy probably slowed to 2% in the first quarter of 2023 from 2.6% in the previous quarter. In addition, according to the Conference Board, growth in real GDP is expected to slow to 0.7% for the whole year from 2.1% in 2022 due to higher inflation and the Federal Reserve’s aggressive monetary policy.

The newest PCE Price Index, the favored inflation indicator of the Fed, will be released by the BEA on Friday. It is anticipated that prices increased by 0.3% in March, the same rate as in February. Most likely, they increased by 4.5% from the previous year. This would be the lowest yearly growth rate since the summer of 2021. Excluding the more volatile food and energy costs, “core” prices probably increased by 0.3% month-over-month and 4.5% year.

If the euro stays above the psychological 1.10 level, it could be a strong bullish signal, likely targeting previous highs of 1.1060 and, afterward, the 1.11 level (new one-year highs for the currency pair).