Euro Struggles to Stay Above $1.14

The euro fell for the second day in a row on Tuesday after European Central Bank President Christine Lagarde stated that there is no need for significant monetary policy tightening in the eurozone.

Bond yields jumped last week, and the euro posted its best weekly performance since March 2020.

The ECB hinted at a rate hike later in 2022 and said a March 10 meeting would be critical in determining how quickly the central bank would wind down its long-running bond-buying program.

The ECB’s hawkish turn caught markets off guard. It sent yields on peripheral debt, particularly Italian debt, higher on Monday. Subsequently, investors worry about the impact of faster-than-expected monetary tightening on the bonds of the world’s most indebted countries. However, on Monday, Lagarde struck a more cautious tone. It said that high inflation is unlikely to become entrenched, which pushed the euro lower.

On Tuesday, the euro was down 0.3 percent in early trading, struggling to keep its head above $1.14.

Market

While money markets were pricing in up to 134 basis points in cumulative rate hikes from the US Federal Reserve over the rest of 2022, analysts were expecting 50 basis points in hikes from the ECB during that time.

Nonetheless, the short-term outlook has shifted in favor of the euro, with the widely followed bond yield spread between US and German 10-year debt narrowing in late January to around 170 basis points (bps) from an April high of 194 bps.

The US dollar index increased by 0.3 percent to 95.67.

Bitcoin and the Australian dollar gained as European equity markets rallied on Monday. However, the latter was a little softer on Tuesday as a cautious mood prevailed in Asia. The Australian dollar was broadly flat at $0.7127.

On Monday, bitcoin broke through its 50-day moving average to reach $44,000 for the first time in nearly a month, and it held there in Asia for a gain of more than 17 percent in four sessions.