EUR/USD finally managed to push above 1.10 last week after the FED meeting last Wednesday, having made quite a comeback since the lows below 0.94 in late September. The ECB didn’t sound as hawkish the next day, which the market took as a sign of a possible top in interest rates coming up.

As a result, this pair reversed lower and the impressive employment and services figures on Friday have turned the USD bullish and risk sentiment negative in financial markets, which has been weighing on EUR/USD. We’re hearing ECB members today reminding us that inflation is still quite high and trying to convince markets that they’re not down with rate hikes yet.

Comments from the ECB Governing Council Member Nagel

• It would be dangerous to think inflation problem is solved
• More significant rate hikes are needed and rate cuts are not on the agenda

• Does not think ECB has to choose between fighting inflation and avoiding a recession
• We are not very far from the peak of inflation
• The better economic environment makes our monetary task easier

Is peak inflation the new ‘transitory’ talk? We may very well be heading towards that direction it would seem. But the economic data is not in support of further economic tightening, as industrial production numbers from Germany showed today, indicating a 3.1% contraction in activity. So, it seems like EUR/USD is heading lower and

Latest data released by Destatis – 7 February 2023

• December industrial production -3.1% MoM vs -0.7%  expected
• Prior +0.2%; revised to +0.4%

That’s a big miss on estimates as German industrial output suffers towards the end of the year, after a bit of a recovery early on in 2022 from the pandemic slump. That has resulted in the calendar-adjusted production index is 3.9% lower than in December 2021. That’s not a good sign that economic prospects are improving in the manufacturing sector.

EUR/USD Live Chart