Inflation has been the main reason why central banks have turned hawkish. They started their stimulus packages to help the economy at the beginning of the pandemic and simply kept adding further to their positions, until tens of trillions of dollars and euros had been spent. That kept the economy going and yesterday’s manufacturing reports from Europe and the US confirmed that.

But, that has brought huge inflation with it. We are seeing numbers we haven’t seen in decades, with the CPI (consumer price index) surging to 7.5% in the US in January, and we will probably see another increase in February. Europe is a little behind with inflation, with the headline CPI standing at 5.1% in January, while February was expected to come in at 5.4%.

EUR/USD breaking below the 1.11 support, despite surging CPI inflation

But, the headline CPI inflation jumped to 5.8% instead, which, coming from 5.1% in January, is a lot for one month. The European Central Bank hasn’t announced a hike and markets are not expecting one any earlier than summer. But, today’s jump in inflation might force them to tighten faster, so we have to wait and see what the ECB has to say about today’s numbers. The EUR/USD is heading down to 1.10, after breaking the 1.11 support zone.

Eurozone February Preliminary CPI

• February preliminary CPI YoY +5.8% vs +5.4% expected
• January CPI was +5.1%
• Core CPI YoY +2.7% vs +2.5% expected
• Prior core CPI was +2.3%

Eurozone inflation is soaring to new highs, and this just adds to the pressure on the ECB to communicate a firmer message at next week’s meeting. We’ll see if policymakers have the appetite to commit or try to maintain flexibility, but the latest figures, shown above, just continue to underscore how wrong they were when they talked up their ‘transitory’ narrative last year.

EUR/USD Live Chart